Q2 2020 Pennant Group Inc Earnings Call

August 12, 2020

[music].

Just first when I listen only mode.

After the speaker's presentation, there will be a question answer session.

Asked the question during the second piece parts Star then one when you're Touchstone telephone.

As a reminder, the call maybe recorded.

I'd now turn the concept you host Mr. Dare Bunker, Pinot Chief Executive Officer for you may begin.

Thank you Valerie welcome everyone and thank you for joining us today.

With me today have Danny Walker CEO Gen Freeman, our CFO and John Gartner, our COO before we begin to have a few housekeeping matters.

We filed our earnings press release and 10-Q yesterday. This announcement is available on the Investor Relations section of our website at Www Dot pendant group Dot Com a replay of this call will also be available on our website until five P.M. Mountain on Friday September 11 2020.

We want to remind anyone that may be listening to a replay of this call that all statements made our as of today August 12, 2020, and these statements have not been nor will be updated subsequent to today's call also any forward looking statements made today are based on managements current expectations assumptions and beliefs about our business.

And the environment in which we operate 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 result.

Except as required by federal Securities laws pendant and its affiliates do not undertake to publicly update or revise any forward looking statements were changes arise as the result of new information future events changing circumstances or for any of the reason.

In addition, the pending group Inc. is a holding company with no direct operating assets employees or revenues.

Certain of our wholly owned independent subsidiaries collected 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 Tennant company, we our and us refer to the pending group Inc. and its consolidated subsidiaries.

All of our operating subsidiaries and service center operated by separate wholly owned independent companies that have their own management employees in assets.

References here into the consolidated company and its assets and activities as well as the use of the terms, we us our and similar terms used today are not meant to imply there shouldn't be construed as meaning that the pedigree of being cut direct operating assets employees or revenue or that any of the subsidiaries are operated by the pending group.

Also we supplement our GAAP reporting with non-GAAP metrics when viewed 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 a GAAP to non-GAAP reconciliation is available in yesterday's press release and is available in our 10-Q with that I'll turn the call over to.

Danny Walker CEO Danny.

Thank you Derek good morning, everyone. Thank you for joining us today to discuss pendant second quarter 2020 results.

We are pleased with the clinical and financial results. Our local leaders achieved in both segments I'm inspired by the countless access service and leadership, we've witnessed this quarter and I'm deeply grateful for each one of our team members. We often referred to these folks as heroes and you see signs throughout the.

The healthcare industry seeing heroes work here.

Sometimes I feel like that statement is a little trite because these heroes our actual people.

They have actual families they have hopes and dreams and they're facing very real risks as they continue to care for those in our.

Organization, we are so grateful for each one of them and encourage them as they continue forward.

Overall this was a strong quarter with adjusted EBITDA, increasing nearly 60% quarter over quarter and as we announced yesterday in our press release, we are raising our annual earnings guidance for the remainder of the year, Jim will discuss our financial results in more detail, but I want to point out that our adjusted earnings Rick.

Results.

We do not include any cares act funds, nor the benefit of the sequestration holiday and they do not include a modest amount of co. Good related expenses that were very clearly identifiable.

In addition, we estimate that we have experienced potential cope lost.

Hi, good related revenue of $8.1 million since the start of the pandemic through the end of the quarter.

In the last six months, we have successfully navigated an unprecedented pandemic. These significant home health reimbursement change in continued spin related system transitions.

Our strong results in the face of these many challenges exemplify the resilience of our local leadership model and our ability to drive long term value in both segments for the benefit of our stakeholders and the communities we serve.

In our home health and Hospice segment, we achieved strong top and bottom line financial results, while improving on a number of clinical measures. Our hospice average daily census grew uninterruptedly throughout the quarter and as of June Thirtyth stands at 18%, 0.3% above the prior year quarter.

Our home health volumes experienced a V shaped pattern that was driven primarily by stay at home mandates and the delay of elective procedures from our low point in mid May our total home health census grew 10.6% through June Thirtyth, resulting in an overall 1.5.

Percent improvement from our March 11, pre cobot high point.

Since the end of the quarter home Health census has continued to grow despite the increase in the number of case cobot cases in many geographies we serve.

Well, our local leaders drove census growth they simultaneously managed costs in a disciplined manner, leading to segment EBITDA of 10.4 million an increase of 41.8% over the prior year quarter, well, all while deploying special care programs for frontline staff establishing daily.

Tracking mechanisms and ensuring adequate PE and testing availability to confront the pandemic.

Simultaneously, our clinical outcomes and quality measures continue to improve in a number of areas. The number of our home health agencies with the CMS star rating of 4.5 or five increased 10% over the prior year quarter, our re hospitalization rate continues to decline and our hospice quality.

Due to improve.

These results highlight the tremendous advantage of decentralized leadership with service center support that can dynamically respond to various community needs market by market with precision.

We are also pleased with the progress our operators and clinicians have made navigating pdgm during the quarter, though we believe it's too early to draw conclusions about the long term effects of Pdgm. So far our current results are ahead of expectations based upon our preparation behavior.

Adjusted funds and patient population, we are increasingly confident in our ability to adapt and thrive in the new reimbursement environment.

Turning to our senior living business, while facing cobot related obstacles. The second quarter represented another strong step forward and our long term cultural and clinical development.

As of yesterday, we were serving 13 residents with active cobot 19 cases across six of our 54 senior living communities in the midst of the pandemic. Our total senior living occupancy declined 2.2% during the quarter end declined an additional 2% since as cases increased in the.

States, where we are concentrated.

Despite these co bid related declines our occupancy see still stood fit 40 basis points higher and revenue per occupied unit increased 3.2% quarter over quarter, excluding communities acquired in the last 12 months.

We are also we also saw our segment EBITDAR adjusted EBITDAR increased 12.3% to 13.5 million and our adjusted EBITDA increased 47.5% to 4.6 million over the spin adjusted prior year quarter as our local leaders effectively.

Adapted to increasingly complex operating conditions, which have varied from market to market. The pandemic is confirming our long held view.

That's the senior living community.

Isn't important care delivery setting and that there is a growing need for senior living operators to prioritize care programs, including make infection control. In addition to providing quality of life amenities. We anticipate does depend demicks impact may continue for a period of time, but our local operating model and clinical.

Strength to position us well to address the community demand for robust care and wellness programs in a high quality of life setting.

I'd like to take a step back and remind everyone about the investment thesis for our senior living business.

There is enormous ups inherent upside in our senior living communities, given our below market entry prices and our operating model that provides the tools for our local leaders to build significant value over time, what we're experiencing and our senior living business right. Now is part of the cyclical nature of health care and a Ken.

To the industry headwinds, we faced when starting our home health and hospice business 10 years ago. Our platform represents a unique opportunity for our stakeholders to experience similar long term value creation within earnings producing senior living business at a time of significant industry disruption.

Much like Insein incubated our development during our early stage growth pendants true value comes from the dual opportunity of our strong home health in hospice business and the cultivation of a second growth story in our senior living business because of our strong balance sheet disciplined approach to capital allocation.

An entrepreneurial leadership leadership model, we can pursue both compelling growth story simultaneously by driving further organic growth in our existing portfolio and continuing as an opportunistic consolidator in both the highly fragmented home health and hospice and senior lifting living industries.

With that I'll hand, it off the Derek to discuss our recent investment activity Barrick.

Thanks Danny.

During the second quarter in sense, we were pleased to keep executing on our disciplined growth strategy to the acquisition of four hospice agencies and to home health agencies in Arizona, Utah and Idaho.

All of these transactions were off market opportunities.

And agencies were largely strategic tuck in acquisition identified and led by our local operators, allowing us to leverage our existing strength in those states in adjacent markets.

With the support of their cluster and resource partners. Our local leaders were able to transition these operations onto our platform with relative smoothness.

Thanks to their creativity and rigorous execution of best practices developed over dozens of acquisitions.

We're excited to welcome these agencies into the pennant family and look forward to their growth over time within our cluster driven model.

We also continue to make progress on the previously announced home health joint venture with scripts health, which we anticipate closing early in the fourth quarter.

Our pipeline of acquisition opportunities remains healthy.

As we shared last quarter, an important part of our pandemic response was improving our cash position and revolver availability to be ready to move quickly for the right opportunities whether source from market offerings or cultivated network of off market partners.

We're pleased with the current strength of our balance sheet and access to capital even after executing multiple transactions during the quarter.

We think there are many more opportunities this year and beyond for growth through acquisitions.

With that ill hand, it over to Gen to provide more detail in the Companys financial performance Jen.

Thank you Derek and good morning, everyone.

Detailed financial results for the three months ended June Thirtyth 2020 are contained in our 10-Q and press release filed yesterday.

For the three months ended June Thirtyth 2020, we reported total GAAP revenue of 92.7 million.

An increase of 10 million or 12.1% evident prior year quarter.

GAAP diluted earnings per share this handset and adjustability diluted earnings per share at 24 cents.

Non-GAAP adjusted earnings per diluted share 24 cents represents 118% increase over spent adjusted second quarter 2019 result at 11 cents.

We have strong revenue and earnings per share results in a consistent operational execution of our field leaders during a very difficult operating environment.

Also benefited from a disciplined management of general and administrative costs.

Other key metrics included.

So at least $6 million that cash on hand as of August 10, 2020.

During the second quarter cash generated from operations at 43.4 million.

15.4 million, excluding the Medicare advance payment.

A lease adjusted net debt adjusted EBITDA ratio at 4.7 times as of June Thirtyth 2020.

Full availability on our 75 million line of credit as an obvious and cat 2020.

During the second quarter, leaving approximately $10 million inherent act provide relief for which we did not apply.

After careful analysis, we determined entity in the best interest of the organization to reject Chinese.

Which we did during the quarter.

So our results do not include the impact any provider and on the size money.

We also apply for every seat approximately $28 million in EMEA Medicare payment.

Which we used to pay down the outstanding.

We have owner.

He is in the half payments are subject to automatically business to offset to new claims beginning August Twentyth 2012.

We also intend to utilize the Harris Act payroll tax deferrals program to delay came.

At approximately 7.3 million at the estimated employer portion payroll taxes for 2020.

I'm going to Heres Act happily spends are near the end of 2021 and half ended 2022.

Finally during the quarter, we saw positive impact.

Thanks, a million in GAAP revenue and the temporary suspension of the 2% Medicare payment sequestration established by the carriers Act.

Please note that our non-GAAP adjusted earnings per share results excluded the benefit of the sequence patient holiday as a net against Covis 19 related costs.

We estimate additional impact that $2 million from the sequestration holiday fitting ended 2012.

As we announced in our press release yesterday, we are affirming our rapid annual revenues items range of 376 million to 386 million and we are raising our annual adjusted earnings per share guidance to a range of 71 cents to 78 cents.

The midpoint of which represents a 34.2% increase over the midpoint of our previous earnings guidance.

The 2020 guidance is based upon diluted weighted average common shares outstanding approximately 30 million an effective tax rate of 26.4%.

Inclusion of acquisition announced here today.

On the exclusion of costs related to startup operations acquisition related costs.

Station revenue and held and related costs.

Or nonrecurring expenses related to set our transition services and stock based compensation.

While there remain unknowns about only and that pandemics future affect the data we have available at this point gives us confidence in our ability to meet our eyes.

We believe our operating model and whole strategy enable us to be successful and changing operating environment, how that 19 included.

In addition to the measures these taken to mitigate revenue impact as you adjust our expenses.

Thank you that have done that presents new opportunities for resilient operators that are responses to level.

And with that I'll turn the call back over to Daniel Daniel. Thank you Jim before we open it up for Q in a it's our custom each quarter to share a few examples of our local leaders exemplifying the best of our core values I'd like to share two of these although there are many more like it across the organization I wish I had time to today to individually plays.

Each of them.

First emblem home health in hospice in Phoenix, Arizona led by newly announced CEO, Mitch North and directors of clinical service the lease Olson and Kristen Carpenter has produced remarkable financial and clinical outcomes, while truly going above and beyond to meet the needs of their pick their partners in the local health care community there.

Revenue grew 28% over the prior year quarter and EBIT in the second quarter was nearly 580000.

An increase of 96% over the prior year quarter as emblem continued to grow the local team elevated executive director, Sean Bluetooth and directors of clinical service, Sally creative and Kathy Stolberg, each trusted internal partners to expand geographically in better meet the needs of our.

Or local community partners, while driving these impressive results emblem emblem has established itself as a trusted resource to the strong network of local partners in the insight dependent care continuum their leadership in the local community was especially evident during the initial months of the pandemic when they quickly implemented creative.

An effective solutions to the complex needs of their acute and post acute partners.

Next it Cranberry court assisted living in Wisconsin Rapids, Wisconsin, Executive Director Crystal Stover and wellness director brief Putin ski have led their team to successes. They built a reputation as a preferred community partner and employer of choice.

Since taking over as executive director, a little over a year ago Crystal has helped lead the trend very core team to steady top and bottom line financial growth. Thanks to a culture of caring and dedication to providing life changing service to residents families and pay and employees since the second quarter of 2019.

Revenue has grown 18% thanks to improved occupancy in EBITDAR has increased 56% as the team exemplified discipline and shared ownership over the communities collective results. In addition to becoming a premier senior living solution in the local community Crystal Embree actively support their cluster.

Sure and market partners in northern Wisconsin, helping to build culture and drive results in our sister communities as they share best practices.

We again want to thank our express our thanks to the Mad migration for the leaders and staff in the field and at our service centers working diligently to care for thousands of lives. Each each day. It is through examples like emblem and Cranberry court and many more like it that we are able to achieve success, we will now.

Turn to the Q and a portion for our call of our call as Eric mentioned earlier, we are here with John Dr., Our COO, who is available for questions about operations as well.

Calorie can you please instruct the audience on the Q and a procedure.

Thank you ladies and gentlemen can like that question. Please press Star then one on your Touchtone telephone again, if you would like to ask a question. Please press Star then one one moment please.

Our first question constant.

Thank you line is open.

Hi, great. Thanks, and good morning, everyone.

First question just interested if.

You want to call out any any things to think about in terms of the progression of earnings in the back half of the year relative to the updated guidance.

In terms of whether you think there's more of a ramp from threeq to Fourq you already.

Held up relatively.

Similar and interested as well just just given the fact that you were able to grow EBITDAR in senior living business in the second quarter, which is obviously a challenging quarter for for the segment.

Just in terms of the updated guidance, how you're thinking about.

Year over year earnings growth and senior living in the back half of the year I know occupancy ticked down again.

Just interested when do you think you can you achieve earnings growth given the headwinds that that area shame from covet.

Yes, Thanks, Scott I'll have Gen give you details generally speaking as we look at the second half for the year.

It's important to note that we're better equipped now clinically and operationally to make the adjustments as co bid.

Ebbs and flows in the communities that were serving and and local counties issue different types of orders.

Obviously, we responded quickly in well to the onset of this but as as this continues to move around the country.

Our systems and leaders are better equipped to handle it. So that's the general view as we look at the second half of the year, we fully expect the virus to continue to circulate and affect us, but we're more confident in our ability to make the appropriate adjustments keep our staff and residents and family safe and.

Connected so gen can give you some specifics on the assumptions we have built in.

With that.

So on the high end of our guidance we're looking at.

The increase on our home Health census Ahmed.

Excluding acquisitions that were doing at the end of the here. So we are putting in an increase for acquisitions that we had coming in.

Traded out as third and fourth quarter.

And then our hospice square continue.

Continuing to expect.

Greetings and says at around 3% club acquisitions in July and August.

The senior living side at the high end, where estimate honestly flat senior living head and our low end decline of around 2% and tempus.

Throughout the rest of the here.

And for that cost of service and were considering basically the same Harris office turn it on the high end and then a little bit of an increasing cost of service on the low end and DNA cost around the same percentage.

As a percentage of revenue.

So we are assuming that the resurgence.

Lastly contain that we're able to respond to that effectively and that things are fully recover we're not assuming that there's an experienced lots as old as bill said are sort of normal seasonality to the of Anthony.

And the one acquisition that that is contemplated there's the scripts joint venture, which we have spoken about in the past.

Got it thanks, a lot helpful detail and had a follow up just on the M&A pipeline I know that you highlighted that it appears to be strong across each of the business segments. Just it should it becomes a little more detail in terms of.

Whether you do see a bias towards any of the particular segment in terms of Baird, where you see more near term opportunity whether it's in the back after the year end or a 2020 widened.

Just as we think got home health hospice and that senior living.

Yes, I'll give you some thoughts and then have they're going to chime in here, but.

We have seen obviously weve closed deals and we've continued to do that we expect to be able to continue to do that.

They've been in the the home health and hospice space.

Pure play home health businesses have experienced a pretty disruptive environment with the combination of coated since this pressures and pdgm.

Those some of those accounting pulled back from the acquisitions cycle I'm presuming some of its related to those effects and the the prop up from some of the the federal money that's been available but.

We expect those to become more available we think in the first half of next year, maybe even later this year.

And.

But we continue to see a pipeline that we're excited about theres, the increasing disruption in the senior living space. We we we see that there will be opportunities flowing out of that and Derek maybe can comment a little on both.

Yes, I think that covers it pretty well we.

Our disciplined.

Kind of way we've looked at the end market has always focused on where we stand us from a leadership perspective, whereas our balance sheets dead.

And from that perspective, we've seen some great growth and strengthen our leadership within our home health and hospice company across those local operations, which lines up well with the deals to close so far in as Denny mentioned, what we're kind of seeing as we speak into the Crystal ball for the next 18 months or so and.

And we still see some growth or some strong development in our senior living business as well and that market has been.

A little a choppier really as they are the kind of the impact of the co. The 19 has taken sort of a different.

You know has been sort of a prolonged.

On a gradual impact in that industry relative to home health, which kind of saw that V shaped as we mentioned.

So we'll continue to kind of look for deals were still opportunistic, but looking out we like where we stand, particularly in the home health hospice side, but we'll continue to find.

We continue to see a lot of senior living opportunities a mall, just keeping very picky about what we want to explore further.

I understood and then last one for me just as we're working on our models for 2020 wine interested at five so we have that dollar amount in hospice rate updates for the industry, which looked quite positive.

Just interested if you have your estimate you had of what dependent specific.

Great updates would be for home health in hospice for 2021.

Yes.

Yes that.

And again.

For our home health care has our modeling on the whole now proposal when looking at about 2.1% increase.

And on hospice is about 2.2%.

Okay.

All right. Thank you.

Thanks Scott.

Thank you.

Second comes from Frank Morgan of RBC capital markets. Your line is open.

Good morning, I guess first as a housekeeping matter to follow up on Scott's question I, just want to get a clarification in terms of acquisitions. It's only these recent acquisitions that you're putting in your guidance for the rest of the year or is there an expectation for.

Additional deals that are yet announced.

Well, it's only the as acquisitions that have been announced right.

Okay, great on that okay looks like the rate.

The rates look pretty good on the hospice side and I think you Im sorry on the home health care side, I think you tricky trivia part of that to some of your early success in in your patient mix into your coating, but.

How would you assess where you are in that process is is that largely done or do you still see additional upside down from a rate perspective for home healthcare as a result of Pdgm.

Yes.

Thank appreciate the question and I think what we're seeing in as we look at Pdgm and as we try to project out it's a relatively small sample size, what we've seen so far but we're very optimistic and we feel really good about where we're at we think thats kind of the.

Resulted from two things one is our efforts of preparation like you've described our efforts at our local clusters and within our agencies and operations at adapting to these changes and making sure staffer train and were able to code and capture everything accurately.

I think the other side of that.

Has been our patient mix, which is a little bit different maybe than some of that some of the other folks that you're seeing our volumes are based on the community is needs and Thats, how weve always gone about our marketing strategy is to be a resource to the command outpatient mixes is a little bit different and from that we're seeing we're seeing a.

Positive as the the Pdgm reimbursement structure.

Reward some of that care things like wound care and neurological care that may be where less reimbursed under.

The PPS structure in our better reimbursed under the Pdgm structure as we go forward, we think there is opportunity.

There is opportunity on both sides, both as we continue to.

More accurately capture acuity and make sure that are LUPA percentage stays low make sure that we're capturing co morbidities Theres also opportunity on the cost side as we continue to focus and we're working hard to drive down our our cost per visit as well as our visits per episode, while still achieving an extraordinary clinical out.

Outcomes and so thats, what that's the mix and Thats, what we project for the next year that we'll be focused on is continuing to achieve similar results and like I said at the beginning its a small sample size and so.

We feel very good about where we're at and it's.

Very in line with our projections.

But we think there's still opportunity both on the revenue side and the cost side, Yes that was John Dr. And this is Danny and I'll just add to that that we are we were positioned a little differently under the PPS structure in terms of the patient population that we cared for and Pdgm.

Part of the rebalancing of the reimbursement structure kind of moves away from the high therapy utilization, which we'd never we're chasing.

And so I think we're seeing kind of the favorable side of that but we've got we still have I think we'll still be doing meaningful work on that throughout the remainder of the year.

Just like we're continuing to work on the spin related issues and.

We need more volume to really kind of refined the whole process and.

Overall, we feel really good about where we're at.

Got you thanks, very much maybe one on the senior housing side.

Obviously, you had the benefit of having a much lower entry point acquisition price on year deals, but I'm. Just curious how do you think about cash flow breakeven I mean are there is there an occupancy number that you just say this this is the point at which.

We are not covering our financing costs or any color around that and then my other question was just any discernible difference that you're seeing in the occupancy trends between aylwin aisle. Thanks.

Yeah, Great question so.

It we do.

The first question about what's our like Red Red line.

We don't even consider that honestly, it's so low that it's kind of.

Irrelevant for us, but I would just.

Estimating I would pull it out at somewhere in the.

Mid to low 60% occupancy range.

Depending on the particular operation and its history and and the condition. It was in when we.

Invested and then whatever additional capital expenditures, we've put in we just we have a really disciplined.

Approach to tracking all of those dollars that go into each of these communities and then.

Set set the targets from there, but but theres ample room for us there and.

And really we should never have to really worry about that if we're getting things right on the leadership model fronts and the experience that our employees and residents and their families are having and so.

Those are the things that concern us more I suppose Jan and there could probably model that at some point.

Out into the future, but it's it's well below where we're at right now and and so I think the main Mitt takeaway. There is there's just there's ample space for us to drive long term success and then.

Obviously sitting it.

Right now in the high Seventys of occupancy, we're still have a lot of room in terms of upside as things with co bid continue to resolve themselves in our teams continue to put their clinical prowess out it for for families to really see and understand how we work to keep everyone safe and communicate.

And then a variety of factors there.

The second part of your question.

Is the ideal since this has been more directly affected there has been more those decisions are more voluntary for the families.

There are more of a lifestyle choice than they are a healthcare choice and so we have seen.

On a higher percentage basis, but the our ideal unit count is so small that it's not something that I have off top my head.

Honestly so.

There is more pressure on the ideal side.

But we continue to see move ins based on exactly what Weve. Our thesis is that there is healthcare matters and caregiver issues that drive placement in the senior housing space and that's primarily memory care and assist true assisted living supportive living.

Yes.

Decisions so.

Hopefully that helps.

No thats perfect. Thank you very much.

Alright, Thank you Frank.

Thank you again, if you like to ask the question.

Then one you touched on telecom.

One moment please.

Yes.

I'm showing no further questions at this time I'll turn the call back over to CEO, Daniel Walker for any closing remarks.

Thank you Valerie we would just again like to express our deep appreciation for the people we call them heroes.

But these are men and women evolve.

Ages race gender all the diversity that exist in this country and they are near heroic in their efforts and yet they are real people that are facing real risks and our hearts are just full of gratitude for.

The sacrifices and the commitment to principled service of others and care for others that has been exhibited this quarter and really has been the hallmark of how we've operated for years and plan to operate in the future. So thank you to our team into those that are.

Our stakeholders, who believe in us thank you.

Thank you ladies and gentlemen did that concludes today's conference. Thank you participating in the all disconnect have a great day.

Yes.

[music].

Ladies and gentlemen, thank you to stand by and welcome to the public with Q2 2023 topical at this time, all but just.

<unk>.

The presentation. All your question the I guess that's one.

Of course, you know and especially please press Star then one on your Touchstone callable.

As a lot of the call maybe recorded.

I would actually the cost of G.O. Smith, the Derek Walker <unk>, Chief Executive Officer. So you may begin.

Thank you Valerie welcome everyone and thank you for joining us today.

With me today, how did you Walker CEO, John Freeman, our CFO and John Dr. our COO.

Before we begin out a few housekeeping matters.

We filed our earnings press release and 10-Q yesterday.

And now it's been is available on the Investor Relations section of our website at Www Dot pedal group Dot com.

A replay of this call will also be available on our website until five P.M. Mountain on Friday September 11 2020.

We want to remind anyone that may be listening to your a replay of this call that all statements made our as of today August 12, 2020, and these statements have not been though will be updated subsequent to today's call Oh.

Also any forward looking statements made today are based on managements current expectations assumptions and beliefs about our business and the environment in which we operate these statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on todays call listeners should not place undue reliance on forward looking statements and.

Encouraged to review our SPC filings for a more complete discussion of factors that could impact our result.

Except as required by federal Securities laws, and its affiliate do not undertake to publicly update or revise any forward looking statements where changes arise as a result of new information future events changing circumstances or for any other reason.

In addition, the pending group Inc. is a holding company with no direct operating assets employees or revenue.

Certain of our wholly owned independent subsidiaries collected collectively referred to at the service Center.

Provide accounting payroll human resources information technology legal risk management and other services to the other operating subsidiaries their contractual relationships with such subsidiary.

The words parent company, we our and us refer to the pending group Inc. and its consolidated subsidiaries.

All of our operating subsidiaries and the service center operator by separate wholly owned independent companies that have their own management employees enough that.

References here into the consolidated company and its assets and activities as well as the use of the terms, we us our and similar terms used today are not meant to imply there shouldn't be construed as meaning that the pedigree of being kind of direct operating assets employs a revenue or that any of the subsidiaries are operated by the pedal group.

GAAP to non-GAAP reconciliation is available in yesterday's press release and is available in our 10-Q.

That I'll turn the call over to Danny Walker CEO Danny.

Thank you Derek good morning, everyone. Thank you for joining us today to discuss tenant second quarter 2020 results.

We are pleased with the clinical and financial results, our local leaders achieved in both segments.

I'm inspired by the countless access service and leadership, we've witnessed this quarter and I'm deeply grateful for each one of our team members. We often referred to these folks as heroes and you see signs throughout the healthcare industry, saying heroes work here.

Sometimes I feel like that statement is a little trite because these heroes our actual people.

You have actual families they have hopes and dreams and they're facing very real risks as they continue to care for those in our.

Organization, we are so grateful for each one of them and encourage them as they continue forward.

Overall this was a strong quarter with adjusted EBITDA, increasing nearly 60% quarter over quarter and as we announced yesterday in our press release, we're raising our annual earnings guidance for the remainder of the year Gen will discuss our financial results in more detail, but I want to point out that our adjusted earnings rich.

So.

Do not include any tiers that funds, nor the benefit of the sequestration holiday and they do not include a modest amount of cobot related expenses that were very clearly identifiable.

In addition, we estimate that we have experienced potential cope lost.

Cobot related revenue of $8.1 million since the start of the pandemic through the end of the quarter.

In the last six months, we have successfully navigated an unprecedented pandemic a significant home health reimbursement change and continued spin related system transitions.

In our home health in Hospice segment, we achieved strong top and bottom line financial results, while improving on a number of clinical measures. Our hospice average daily census grew uninterruptedly throughout the quarter and as of June Thirtyth stands at 18.3% above the prior year quarter.

Our home health volumes experienced the V shaped pattern that was driven primarily by stay at home mandates and the delay of elective procedures from our low point in mid May our total home health census grew 10.6% through June Thirtyth, resulting in an overall 1.5.

Percent improvement from our March 11, pre cobot high point.

Since the ended the quarter home Health census has continued to grow despite the increase in the number of Keith Cobot cases in many geographies we serve.

While our local leaders drove census growth the simultaneously managed costs in a disciplined manner, leading to segment EBITDA of 10.4 million an increase of 41.8% over the prior year quarter, well, all while deploying special care programs for frontline staff establishing daily.

Tracking mechanisms and ensuring adequate pp in testing availability to confront the pandemic.

Simultaneously, our clinical outcomes and quality measures continue to improve in a number of areas. The number of our home health agencies with the CMS star rating of 4.5 or five increased 10% over the prior year quarter. Our re hospitalization rate continues to decline and our hospice quality trends continue.

You to improve.

These results highlight the tremendous advantage of decentralized leadership with service center support that can dynamically respond to various community needs market by market with precision.

The adjustments and patient population, we are increasingly confident in our ability to adapt to thrive in the new reimbursement environment.

Turning to our senior living business, while facing Kobin related obstacles. The second quarter represented another strong step forward in our long term cultural and clinical development.

States, where we are concentrated.

Despite these cobot related declines our occupancy will see still stood fit 40 basis points higher and revenue per occupied unit increased 3.2% quarter over quarter, excluding communities acquired in the last 12 months.

We're also we also saw our segment EBITDAR adjusted EBITDAR increased 12.3% to 13.5 million and our adjusted EBITDA increased 47.5% to 4.6 million over the spin adjusted prior year quarter as our local leaders effectively.

Adapted to increasingly complex operating conditions, which have varied from market to market.

Pandemic is confirming our long held view.

And that the senior living community is an important care delivery setting and that there is a growing need for senior living operators to prioritize care programs, including make infection control. In addition to providing quality of life amenities, we anticipate that the pandemics impact may continue for a period of time.

But our local operating model and clinical strength position us well to address the community demand for robust care and wellness programs in a high quality of life setting.

I'd like to take a step back and remind everyone about the investment thesis for our senior living business.

There is enormous ups inherent upside in our senior living communities, given our below market entry prices and our operating model that provides the tools for our local leaders to build significant value over time, what we're experiencing in our senior living business right. Now is part of the cyclical nature of healthcare and a Ken.

Much like enzyme incubated our development during our early stage growth pendants true value comes from the dual opportunity of our strong home health and hospice business and the cultivation of a second growth story in our senior living business because of our strong balance sheet disciplined approach to capital allocation.

Entrepreneurial leadership leadership model, we can pursue both compelling growth story simultaneously by driving further organic growth in our existing portfolio and continuing as an opportunistic consolidator in both the highly fragmented home health and hospice and senior lender living industries.

With that I'll hand, it off the Derek to discuss our recent investment activity Derrick.

Thanks Denny.

During the second quarter and since we were pleased to keep executing on our disciplined growth strategy to the acquisition of four hospice agencies and to home health agencies in Arizona, Utah and Idaho.

All of these transactions were off market opportunities.

His agencies were largely strategic tuck in acquisitions identified and led by our local operators, allowing us to leverage our existing strength in those states in adjacent markets.

With the support of their Clusterin resource partners, our local leaders were able to transition these operations onto our platform with relative Smith.

Thanks to their creativity and rigorous execution of best practices developed over dozens of acquisitions.

We're excited to welcome these agencies into the pennant family and look forward to their growth over time within our cluster driven model.

We also continue to make progress on the previously announced home health joint venture with scripts health, which we anticipate closing early in the fourth quarter.

Our pipeline of acquisition opportunities remains healthy.

We're pleased with the current strength of our balance sheet and access to capital even after executing multiple transactions during the quarter.

We think there are many more opportunities this year Mb on for growth through acquisitions.

With that I'll hand, it over to Jed to provide more detail on the Companys financial performance Jed.

Thank you Sarah and good morning, everyone.

Detailed financial results for the three months ended June Thirtyth 2020 are contained in our 10-Q and press release filed yesterday.

For the three months ended June Thirtyth 2020, we reported total GAAP revenue of 92.7 million.

An increase of 10 million or 12.1% over the prior year quarter.

GAAP diluted earnings per share of this handset and adjustability diluted earnings per share of 24 cents.

Non-GAAP adjusted earnings per diluted share of 24 cents represents 118% increase.

Our spend adjusted second quarter, 2019 result out of that it was that.

We have strong revenue and earnings per share results due to the consistent operational execution of our field leaders, yes, very difficult operating environment.

We also benefited from a disciplined management of general and administrative costs.

Other key metrics included.

Proximately $6 million a cash on hand as of August into 2020.

During the second quarter cash generated from operations at 43.4 million.

And 15.4 million, excluding the Medicare advantage payment.

While these adjusted net debt adjusted EBITDA ratio at 4.27 times as of June Thirtyth 2020.

Full availability on our 75 million line of credit as of August and tax 2020.

During the second quarter, we received approximately $10 million inherent.

Providing relief for which we did not flat.

After careful analysis, we determined it will be in the best interest of the organization Jimmy Jack Charlie.

Which we did during the quarter.

So our results do not include the impact of any provide relief five model.

We also applied for and received approximately $28 million in EMEA Medicare payment.

Which we used to pay down the outstanding balance on our revolver.

He is India payments are subject to automatically to that offsets to new claims.

Getting August Twentyth 2012.

We also intend to utilize the Harris apps payroll tax deferral program to delay payment of approximately 7.3 million at the estimated employer portion of payroll taxes.

Well I.

Im going to hear that happily spans our deal at the end of 2021 and half.

2022.

Finally during the quarter, we saw positive impact.

Thanks, a million in GAAP revenue from the temporary suspension of the 2% Medicare payments sequestration established by the Harris.

Please note that our non-GAAP adjusted earnings per share results.

The benefit of the sequestration holiday as a net against Covance 19 related cost.

We estimate additional impact that $2 million from the sequestration holiday through the end 2012.

As we announced in our press release yesterday, we are affirming our rapid annual revenue guidance range of 376 million to 386 million and we are raising our annual adjusted earnings per share guidance to a range of 71 cents to 78 cents.

The midpoint of which represents a 34.2% increase over the midpoint of our previous earnings guidance.

In 2020 guidance is based upon.

It is weighted average common shares outstanding of approximately 30 million an effective tax rate of 26.4%.

We should have acquisition announced here today.

And the exclusion of costs related to startup operations acquisition related cost.

Construction revenue and holding related cost.

Then or nonrecurring.

Related to set our transition services.

Based compensation.

While they remain unknown is about only and that of the pandemics future affect the data we have available at this point gives us confidence in our ability to meet our eyes.

We believe our operating model and growth strategy enable us to be successful.

Hey, Jay operating environment, how does 19 included.

In addition to the measures these taken to mitigate revenue impact as you adjust our expenses. We believe that have done that presents new opportunities for resilient operators on a responsive to level.

And with that I'll turn the call back over to Danny Dang. Thank you Jim before we open up for Q in a it's our custom each quarter to share a few examples of our local leaders exemplifying the best of our core values I'd like to share two of these although there are many more like it across the organization I wish I had time to today to individually place.

Each of them.

First emblem home health in hospice in Phoenix, Arizona led by newly announced CEO, Mitch North and directors of clinical service the lease Olson and Kristen Carpenter has produced remarkable financial and clinical outcomes, while truly going above and beyond to meet the needs of their their partners in the local health care community there.

Revenue grew 28% over the prior year quarter and EBIT in the second quarter was nearly 580000.

An increase of 96% over the prior year quarter as emblem continued to grow the local team elevated executive director, Sean Bluetooth and directors of clinical service, Sally creative and Kathy Stalberg, each trusted internal partners to expand geographically in better meet the needs of our.

Local community partners.

Driving these impressive results emblem emblem has established itself as a trusted resource to the strong network of local partners in the insight dependent care continuum their leadership in the local community was especially evident during the initial months of the pandemic when they quickly implemented creative and effective solutions to the complex needs.

Is there acute and post acute partners.

Next it Cranberry court assisted living in Wisconsin Rapids, Wisconsin, Executive Director Crystal Stover and wellness director breed Penske have led their team to successes. They built a reputation as a preferred community partner and employer of choice.

Since taking over as executive director, a little over a year ago Crystal has helped lead the trend very core team to steady top and bottom line financial growth. Thanks to a culture of caring and dedication to providing like changing service to residents families and pay and employees since the second quarter of 2019.

Revenue has grown 18% thanks to improved occupancy in EBITDAR has increased 56% as the team exemplified disciplined and shared ownership over the communities collective results. In addition to becoming a premier senior living solution in the local community Crystal Embree actively support their cluster.

In market partners in northern Wisconsin, helping to build culture and drive results in our sister communities as they share best practices.

We again want to thank our express our thanks to the maturation for the leaders and staff in the field and at our service centers working diligently to care for thousands of lives. Each each day. It is through examples like emblem and Cranberry court many more like it that we are able to achieve success will now.

Turn to the Q and a portion for our call of our call as Derek mentioned earlier, we're here with John Dr., Our COO, who is available for questions about operations as well.

Valerie can you please instruct the audience on the Q and a procedure.

Thank you ladies and gentlemen, good question. Please press Star then one on your Touchtone Telecom again, if you would like to ask a question. Please press Star then one one moment please.

Our first question constant.

And your line is open.

Hi, great. Thanks, and good morning, everyone.

First question just interested if.

You want to call out any anything specific about in terms of the progression of earnings in the back half of the year relative to the our updated guidance.

In terms of whether you think there is more of a ramp from Threeq to Fourq you already takes those will look relatively.

Similar.

Interested as well just just given the fact that you were able to grow EBITDAR in senior living business or the second quarter, which is obviously a challenging quarter for for the segment.

Just in terms of the updated guidance, how you're thinking about.

Year over year earnings growth and senior living in the back half of the year I know occupancy checked out again.

Just interested why do you think you can you achieve earnings growth given the headwinds that that area shame from covet.

Yes, Thanks, Scott I'll have Gen give you details generally speaking as we look at the second half of the year.

It's important to note that we're better equipped now clinically and operationally to make the adjustments as co bid.

Ebbs and flows in the communities that were serving and.

And local counties issue different types of orders.

Obviously, we responded quickly and well to the onset of this but as as this continues to move around the country.

Our systems and leaders are better equipped to handle it so thats. The general view as we look at the second half of the year, we fully expect the virus to continue to circulate and affect us.

But we're more confident in our ability to make the appropriate adjustments keep our staff and residents and family Safend connected so Jim can give you some specifics on the assumptions we have built in.

So on the high end of our guidance, we're looking at a modest increase at our home health.

That is ahmed.

Excluding the acquisitions that were doing at the end of the here. So we are putting in an increase for acquisitions that we have coming in.

Throughout the third and fourth quarter.

And then our hospice square continue.

Continuing to access.

Thanks, and says at around 3% plus acquisitions and July and August.

Senior living side at the high end, where they made on freight flat senior living center.

And our low end decline at around 2% incidences.

Throughout the rest of the here.

And.

Cost of service, we're considering basically the same arris cost of service plan and then a little bit of an increase in cost of service on the allowance and DNA costs around the same percentage as a percentage of revenue.

So we are assuming that the resurgence.

Legal team that we're able to the cloud Hewlett effectively and things are fully recover we're not assuming that there have experienced losses held as built that are sort of normal seasonality through other acetate yet.

And the one acquisition that that is contemplated there's the scripts joint venture, which we have spoken about in the past.

Got it thanks, a lot of helpful detail.

A follow up just just on the M&A pipeline I know that you highlighted that.

Appears to be strong across job each of the business segments, just give us a little more detail in terms of.

Whether you do see a bias towards any of the particular segments in terms of Baird, where you see more near term opportunity whether it's in the back after the year end or a 2020 wide.

Just as we think that home health hospice and that senior living.

Yes, I'll give you some thoughts and then have they're going to chime in here, but.

We have seen obviously weve closed deals and we've continued to do that we expect to be able to continue to do that.

They've been in the the home health hospice space.

Pure play home health businesses have experienced a pretty disruptive environment with the combination of coated since this pressures and pdgm.

Those some of those have pulled back from the acquisition cycle I'm presuming some of its related to those effects and the the prop up from some of the federal money that's been available but.

We expect those to become more available we think in the first half of next year, maybe even later this year.

And.

Yes, I think that covers it pretty well we.

Our disciplined.

Kind of way we've looked at the end market has always focused on where we stand us from a leadership perspective, whereas our balance sheet Stan.

And from that perspective, we've seen some great growth and strengthen our leadership within our home health Hospice company across those local operations, which slides up well with the deals at close so far in as Denny mentioned, what we're kind of seeing as we peaking at a crystal ball for the next 18 months or so and.

And we still see some growth or some strong development in our senior living business as well and that market has been.

A little a choppier really as they are the kind of the impact of the co. The 19 has taken sort of a different.

You know has been sort of a prolonged.

End of a gradual impact in that industry relative to home health, which kind of saw that V shaped as we mentioned.

So we'll continue to kind of look for deals were still opportunistic, but looking out we like where we stand, particularly in the home health and hospice side, but we'll continue to find.

We continue to see a lot of senior living opportunity as a mall or just keeping very picky about what we want to explore further.

I understood and then last one for me just as we're working on our models for 2020 wine interested if Bob So we have that dollar amount in hospice rate updates for the industry, which looked quite positive.

Just interested if you have your estimate of what dependent specific.

Great updates would be for home health in hospice for 2021.

Yes.

Yes, Scott this is John again.

For our home health providers are modeling on the whole now proposal.

2.1% increase.

And on hospice is about 2.2%.

Okay.

All right. Thank you.

Thanks Scott.

Thank you.

Second comes from Frank Morgan of RBC capital markets. Your line is open.

Good morning, I guess first as a housekeeping matter to follow up on Scott's question I, just want to get a clarification in terms of acquisition. It's only these recent acquisitions that you're putting in your guidance for the rest of the year or is there an expectation for.

Additional deals that are yet announced.

Well, it's only the acquisitions that have been announced Craig.

Okay, great on that okay looks like the rate.

How would you assess where you are in that process is is that largely done or do you still see additional upside down from a rate perspective for home health care as a result of Pdgm.

Yes.

Resulted from two things one is our efforts are preparation like you've described our efforts at our local clusters and within our agencies and operations at adapting to these changes and making sure staffer train and were able to code and capture everything accurately.

I think the other side of that.

Positive as the the Pdgm reimbursement structure.

Reward some of that care things like wound care and neurological care that may be were less reimbursed under.

The PPS structure in our better reimbursed under the Pdgm structure as we go forward, we think there is opportunity.

There's opportunity on both sides, both as we continue to.

More accurately capture acuity and make sure that are LUPA percentage stays low make sure that we're capturing co morbidities. There's also opportunity on the cost side as we continue to focus and we're working hard to drive down our our cost per visit as well as our visits per episode, while still achieving an extraordinary clinical out.

Outcomes and so that's what that's the mix and Thats, what we project for the next year that we'll be focused on is continuing to achieve similar results and like I said at the beginning its a small sample size and so.

We feel very good about where were up and it's.

Very in line with our projections.

[music].

Part of the rebalancing of the reimbursement structure kind of moves away from the high therapy utilization, which we'd never we're chasing.

And so I think we're seeing kind of the favorable side of that but we've got we still have I think we'll still be doing meaningful work on that throughout the remainder of the year.

Just like we're continuing to work on the spin related issues and.

We need more volume to really kind of refined the whole process and but overall, we feel really good about where we're at.

Gotcha, Thanks, very much maybe one on the senior housing side.

We are not covering our financing costs any color around that and then my other question was just any discernible difference that youre seeing in the occupancy trends between.

Ill now thanks.

Great question so.

It we do.

The first question about what's our like Red Red line.

We don't even consider that honestly, it's so low that it's kind of.

Irrelevant for us, but I would just.

Estimating I would pull it out at somewhere in the.

Mid to low 60% occupancy range.

Depending on the particular operation and its history and and the condition. It was in when we.

Invested and then whatever additional capital expenditures, we've put in we just we have a really disciplined approach to tracking all of those dollars that go into each of these communities and then.

Set set the targets from there, but but theres ample room for us there and.

Those are the things that concern us more I suppose Jan and Derek could probably model that you know at some point.

Out into the future, but it's it's well below where we're at right now and.

So I think the main Mitt takeaway there is there's just there's ample space for us to drive long.

Long term success and then.

Honestly sitting at.

Right now in the high Seventys of occupancy, we're still have a lot of room in terms of upside as things with co bid continue to resolve themselves in our teams continue to put their clinical prowess out for for families to really see and understand how we work to keep everyone safe and community.

Okay.

Then a variety of factors there.

The second part of your question.

Is the ideal census has been more directly affected there has been more those decisions are more voluntary for the families.

There are more of a lifestyle choice than they are a healthcare choice and so we have seen.

On a higher percentage basis, but I.

Ill unit count is so small that.

It's not something that I have off top of my head.

Honestly so.

There is more pressure on the aisle side.

But we continue to see move ins based on exactly what Weve. Our thesis is that there's healthcare matters and caregiver issues that drive placement in the senior housing space and and that's primarily memory care and assist true assisted living supportive living.

Yeah.

Decisions so.

Hopefully that helps.

No thats perfect. Thank you very much.

All right. Thank you Frank.

Thank you again, if you like to ask the question.

Then one you touched on telecom.

One moment please.

Yes.

Im showing no further questions at this time ill turn the call back over to the CEO Daniel Walker for any closing remarks.

Thank you Valerie we would just again like to express our deep appreciation for the people we call them heroes.

But these are men and women evolve.

Ages race gender all the diversity that exist in this country and they are they're heroic in their efforts and yet they are real people that are facing real risks and our hearts are just full of gratitude for.

Our stakeholders, who believe in us thank you.

Thank you ladies and gentlemen did that concludes today's conference. Thank you participating in the all disconnect have a great day.

Q2 2020 Pennant Group Inc Earnings Call

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