Q3 2022 Pennant Group Inc Earnings Call

November 8, 2022

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Okay.

Good day and thank you for standing by welcome to the pennant Group Conference call. At this time, all participants are in a listen only mode.

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

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I would now like to hand, the conference over to your speaker today.

Eric.

Please go ahead.

Thank you Cory and welcome everyone. Thank you for joining US today here with me today are Gary.

Gary <unk>, our CEO Dr.

Dr <unk>, our president and Jen Freeman, our CFO before we begin I have a few housekeeping matters.

The earnings press release, and 10-Q yesterday.

The announcement is available on the Investor Relations section of our website at Www Dot Dot com.

This call will also be available on our website.

On Friday December 19, 2022, we want to remind anyone that may be listening to a replay of this call that all statements made are as of today November eight 2020.

These statements have not been nor will they be updated subsequent to 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 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.

Paul.

Listeners should not place undue reliance on forward looking statements.

Encourage to review our SEC filings for a more complete discussion of factors that could impact our results.

Except as required by federal Securities laws.

<unk> does 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 pennant group is a holding company with no direct operating assets employees or revenues.

Certain of our independent subsidiaries collectively referred to as the service center provide accounting payroll HR it legal risk management and other services to the other operating subsidiaries due contractual relationships with us.

The words pennant Anthony the hour.

The purchase of tenant group, Inc, and its consolidated.

Consolidated subsidiary.

All of our operating subsidiaries and the service center are operated by a separate independent companies that have their own management employees naphtha.

References herein to the consolidated company and its assets and activities as well as the use of the terms we have an hour and similar terms used today are not meant to imply nor should it be construed as meaning that the pending for your patent direct operating assets employees or revenue or that any of the subsidiaries are operated by the SEC.

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 in our 10-Q with that ill turn the call over to you.

<unk> our CEO .

Thanks, Derek and welcome everyone to our third quarter 2022 earnings call. Thank you for joining us today to discuss our quarterly results.

Again, I'd like to recognize our frontline workers staff and leaders and tenants.

His sacrifice everyday and provide life changing service across the communities we serve.

As we've detailed over the last several quarters, we continued to build long term foundational strength through several key efforts.

We are focused on recruiting and developing CEO level health care leaders equipped with best practices.

Accelerate our next phase of growth.

Second we are investing in people systems and data tools designed to improve the ability of our local teams to respond to the unique needs of our health care communities.

These are ongoing processes designed to build the engine that will drive outsized performance for many years to come.

This quarter's earnings didn't fully reflect the progress we expected as we navigated continued wage pressures full sequestration and a softer hospice ADC. We're seeing notable progress as measured by revenue admissions occupancy and cash flow were seeing strength build in many of our markets in clusters.

We are on track to make significant improvement in the second half of 2022 and are positioned to produce strong results going into 2023.

We have substantial latent potential in our existing operations, we've been improving our cash flow and balance sheet.

And we are beginning to return to the brisk pace of strategic acquisitions that we've executed on for much of our history.

We know where we're going how to get there and we're excited about the progress, we're making toward operational excellence and our ability to generate and deploy cash toward accretive growth and active M&A landscape.

As we mentioned in our press release yesterday.

We are revising our guidance for full year 2022 in light of the pressures mentioned earlier, however, our updated guidance demonstrates confidence in our momentum and our momentum through the end of the year and into 2023. We are encouraged by improvements in our recently acquired operations and believe there remains significant.

<unk> opportunity to drive better earnings as we continue to acquire high quality assets and execute with discipline around our core opportunities.

We look forward to tackling the many strategic and organic growth opportunities before us.

At this point I've asked John Gardner to provide an update on our operational and investment results.

Thanks, Brent our third quarter operational results reflect positive momentum in each of our operating segments and our home health and hospice segment strong top and bottom line results were led by a 10, 2% increase in total home health admission at 10, 1% increase in total Medicare home health.

Missions, and a seven 8% increase in hospice.

Each over the prior year quarter.

Home Health revenue grew a strong 16, 5% over the prior year quarter as we continued to lean into our relationships with partners across the communities, we serve and our acquisitions from 2021 continue to mature.

So there is still some temporary drag in the growth of our hospice average daily census, due primarily to a shorter average length of stay were improving sequentially as we saw ADC growth, 4% over the second quarter of 2022, which itself was an increase of two 4% over the first quarter.

As our average length of stay normalizes and our local teams continued strong admissions, we expect our ADC growth to return.

To traditional levels.

Our leaders exercise rigorous cost discipline in the face of significant increases in the cost of labor fuel and other inflation sensitive areas, leading to adjusted EBITDA of $14 2 million.

$1 million or seven 7% above the third quarter 2021.

Our clinical metrics continued to be the foundation of our success highlighted by the majority of our home health agencies operating at a CMS star rating of four five or above in a real time acute care hospitalization rate of 12%, which is measurably below the reported national average of 14, 2% and <unk>.

Jos our value proposition to our health system and payer partners.

During the quarter, we acquired the operations of our hospice and palliative care with locations in the Central Valley, and Palm Springs, California to our hospice portfolio. This is a highly strategic acquisition for us as we build on strong proven leaders in our California market with deep partnerships throughout the state helped drive these locations forward.

We also recently announced the acquisition of Kenosha, Visiting Nurse Association of home Health and personal care agency that has served Kenosha, Wisconsin and its surrounding communities for more than 95 years. We are grateful the organization's board has entrusted us with such a significant legacy and excited to run.

A new chapter for another operation in the Milwaukee area, where we also have strong leadership, producing exceptional financial and clinical results.

Staff and patients of <unk> are in good hands with our local leadership team. We're excited for the budding opportunity inherent in each of these acquisitions on.

On the regulatory front.

Recently, we released the 2023 home health final rule, which included Cms's decision to reduce the behavioral adjustment cuts calculated by half for calendar year 2023. These cuts were also offset by a stronger than originally proposed 4% market basket update based on our claims data.

And run rate.

On 2022, Medicare home health revenue, we expect a net negative impact of approximately 1% and our Medicare home health revenue for 2023, while the final rule is negative behavioral adjustments represent a headwind for providers in our industry.

And then as home health and Hospice segment began in and has thrived through periods of uncertainty and reimbursement pets much like today. Thanks to the scalability of our operating model built on local leadership, our commitment to maintaining a strong and flexible balance sheet and our opportunistic approach to acquisitive growth the final rule together.

The growth of Medicare advantage and home health value based purchasing reimbursement programs show, how home health providers that can effectively manage costs and improve quality will be increasingly recognized and rewarded we have been preparing for the implementation of the final rule and much like the change to reimbursement affected through PDGF several years.

[noise] ago, we're confident we can pull the right levers to continue our growth even in a challenging reimbursement environment.

In our senior living segment, we continued our recovery I've taken a step forward in many key metrics.

Same store senior living segment revenue of $32 2 million was an increase of $3 4 million or 11, 8% over the prior year quarter, while adjusted EBITDA of $1 5 million represents growth of $1 4 million over the prior year quarter.

Year to date segment adjusted EBITDA of 4 million represents growth of three 2 million over the prior year period, excluding the communities. We exited year to date average occupancy improved 140 basis points over the prior year quarter and revenue per occupied room increased 12, 2%.

Over the prior year quarter in part due to rate increases that went into effect over the summer and better processes for tracking and billing more accurately for the level of care provided.

Mentum, our senior living leaders are generating is demonstrated by occupancy improving 4% and revpar, increasing $87 or two 5% each over the second quarter 2022 on a same store basis.

Labour challenges linger with average wages up in the third quarter by two 7% over the second quarter, we continued to attract and develop senior living leaders, who are contributing to and will be instrumental in our turnaround in the segment, we have more to accomplish with higher cost of services and occupancy several points below pre pandemic.

Levels. However, we know that achieving exceptional operational results starts with talented local leaders and resource support.

And as we've been building our leadership strength in this segment are beginning to see the fruits of that key effort.

Overall, we are pleased with the progress made in the third quarter in a challenging operating environment, our operators clinicians resources and service Center partners I'll share a single focus on operational excellence at the same time, our pipeline of potential investments continues to expand we remain focused on evaluating operations that.

Fit our strategic criteria are small to medium sized operations with strong reputations in their communities with significant organic growth potential for our operational expertise and capture that upside for our stakeholders. While we continue to be very disciplined as we look to deploy capital or cash flow is improving.

We're pleased to have a strong balance sheet and we see several dynamics that favors strategic buyers like ourselves that are focused on maintaining the legacy of sellers, providing an exceptional employee experience and delivering quality clinical care.

Finally, I am grateful for the persistent dedication and hard work of our 5400, and then family members and I am confident as we continue to perform we will achieve exceptional clinical and financial results with that I'll hand, it over to Jen for a review of the financials jet.

Thank you John and good morning, everyone.

Detailed financial results for the three and nine months ended September 32022 are contained in our 10-Q and press release yesterday.

Our third quarter results were strong.

<unk> patients.

Slower than anticipated ramp in our hospice volume and our cost of services impacted by elevated labor.

Quarter.

The three months ended September 32022, we reported total GAAP revenue of $118 four.

$4 million.

Increase of $6 4 million or 7% over the prior year quarter.

GAAP diluted earnings per share of <unk>, 10, and non-GAAP adjusted earnings per diluted share of <unk> 14.

An increase of <unk> 10, or 27, 3% over the prior year quarter.

We are pleased to report ongoing strength in our GAAP cash flow from operations for Q3 2022.

$8 1 million.

Bringing our year to date cash flow from operations to $13 million, excluding the repayment of $6 2 million in Medicare advanced payment, which were completed in the second quarter, our year to date cash flow from operations of $19 <unk>.

Also excluding the two announced acquisitions in the third quarter.

Free cash flow what does that imply.

$5 million in Q3, including $2 6 million of Capex for the business.

Our community.

This strong cash flow is important as we take a strong balance sheet and two a recessionary environment.

Members that headwind should present greater acquisition opportunities.

Excited to grow and continue to generate solid cash flow for our stakeholders.

Other key highlights for the three months ended September 32022 include <unk>.

Seven $5 million drawn on our revolving line of credit and $3 million cash on hand at quarter end.

And 198 times net debt to adjusted EBITDA leverage ratio.

As mentioned in our press release yesterday, we are revising our fiscal year 2020 to annual guidance for revenue between $458 million and $462 million.

Consistent with our prior guidance and how we have measured ourselves all year. This excludes revenues from transferred in newly acquired communities will start out with.

Those items added back in our full year revenue.

Would be between $467 million and $473 million.

Additionally, we revised adjusted earnings per diluted share to between 55 and 60.

$33 million of diluted shares.

Adjusted EBITDA was revised to between $31 million and $33 5 million.

Our revised earnings guidance reflects ongoing growth in our home health and hospice admissions and senior living metrics offset by a slow slightly slower than anticipated ramp in our hospice ADC.

Related G&A spend related to investments and creating increased efficiencies and systems and processes, including increased focus on cash collection and.

And investments in training and increased number of leaders that will be poised for new opportunity.

With ongoing rate wage pressure in both operating segments and the service Center.

Staffing inflation and other operating challenges will likely persist for the foreseeable future and continue to create hurdle we have to overcome.

Our leaders across the company are capable of confronting these headwinds and continuing the ramp in performance we've experienced year to date.

We are confident in our future and expect further organic top and bottom line growth in 2023. In addition to opportunities to acquire high quality assets that we expect to execute on over the next year and beyond.

That I'll hand, it to Brent to highlight a couple of our local leaders.

Thanks, Jen, it's my pleasure to spotlight a few leaders in markets in our organization that have achieved remarkable results through operational excellence.

Under the leadership of Ceos and market leaders, Tiffany Marc <unk>, our senior living market covering the state of Wisconsin is experienced in an inspiring turnaround over the past 18 months.

Because of their establishment of and commitment to rigorous adherence to our unique operating model if any in Genie have led the charge to turn on 19, Wisconsin communities.

Focused on finding and developing key leaders in Wisconsin that elevated our operations leaders like CEO , Tammy Wagner, New Chief Marketing Officer, Christine Gomez clinical market leaders, Michele Dove, and Jamie Campbell and strong future CEO level leaders.

In the third quarter 2022, compared to the prior year quarter. This button group of talented Wisconsin based leaders and many others have increased revenue by 22, 7% and <unk>.

EBITDA from a negative $350000 to a positive $534000 growing occupancy by six 9% to 88, 5%.

And revenue per occupied room by 11, 2%. Despite one of the most difficult operating environments we've experienced.

These results are emblematic of what our model is designed to foster talented local leaders supported by expert resources meeting the needs of their local communities and in turn achieving incredible operating results in.

In our home health and Hospice segment, a California market is rapidly turning a flywheel of success due to the leadership of CEO , Andrea Doctor, Jordan Baker, and Adam Bone Ccs yesterday, along the Athena Mcmahon and clinical market leader Bill Bradley cluster leaders knelt Lund, Charlie Marine Coe, and Tim Johnson, and many others we can.

Named.

This group of health care leaders have collectively improved the California markets financial and clinical results building, a deep bench of leaders committed to our model and supporting each other in achieving these results over the last few years. This foundational strength enabled them to successfully transition our home health and hospice joint venture with Scripps Health.

<unk>.

This call hospice in Sacramento, a successful de Novo home health startup and reverse Riverside County, and recently, our hospice and palliative care in the Central Valley in Palm Springs.

In the third quarter of 2022 compared to the prior year quarter. This market increased revenue by 31, 7% in.

EBITDA.

By 148% on the back of hospice ADC that grew by 35% in home health admissions that increased by 11, 2% at the same time the rigorous focus on quality clinical processes is leading to better outcomes and strong star ratings and other clinical measures.

This group of leaders is showcasing what can be achieved in each of their local operations and together as clusters in markets through the application of our unique operating model.

Before we move to Q&A.

Want to once again make sure to recognize and thank all of our incredible clinical partners and frontline workers, who provide life changing service to our patients and residents every day and make us who we are.

With that we'll open it up for questions.

Okay.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask questions you will need to press star one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.

Okay.

Yes.

Our first question comes from the line of.

Tao quake from stifle.

Europe .

Hi, good morning, everyone.

My first question is on the guidance could you help us kind of bridge between the third quarter and the fourth quarter I noticed that the guidance suggests kind of a flat top line performance, but ended up being prudent on the on the EBITDA number I know that the hospice ratings going.

Getting raised in the fourth quarter could you help us.

Explain some of the moving pieces between the third quarter into the fourth quarter.

Sure.

A couple of different things that are going on.

And actually we're going to experience an increase in revenue. So it may look flat because of the way that we're reporting our revenue guidance, but actually we're reporting an increase in revenue.

Could see an increase from our hospice increased rates of about $1 5 million and then with increase with census, and admissions in home health as well as our hospice census growth, we're actually factoring in his desk.

Increase in that as well.

Long with our senior living occupancy improving at a similar pace to what it's been.

And we do.

For GE at G&A to remain at the same percentage.

A little bit less for the fourth quarter than it occurred.

In Q3.

What about on the expense side do you see any cost moderation in the fourth quarter versus <unk>.

We're assuming a similar cost in the <unk>.

Fourth quarter versus Q3.

A little bit of cost moderation and the increase quarter over quarter.

Then the incremental margin on the senior living occupancy growth will be.

There, we can pick up some.

Xtra.

<unk> growth because of.

Capital already covering our indirect costs and having the staff that we need for increased occupancy.

Got it that's helpful. So my second question is on the senior living business, obviously that business has a lot of operating leverage to the upside and looking at this year you were able to grow your rate pretty aggressively at 12%.

If we look at the occupancy growth that 140 <unk> on the same store is relatively small how should we thinking how should we think about the two components.

<unk> going into 2023.

Think about.

Additional recovery.

And the pricing power you have today.

Yes.

I think what we would expect to see is continued growth.

On the rate increases right.

We're trying to catch up with some of the inflationary pressures and we've made consistent.

Okay.

Changes in that regard.

In addition to that we're also doing a much better job of.

Managing each of the residents that are coming and understanding the opportunities from a carrier standpoint, and really getting a full picture of managing both the cost and the revenue opportunities and so as you look into 2023. Some of those same levers that we've been pulling this year, we would anticipate rolling into 2023.

And we've consistently seen occupancy growth, which is encouraging.

In spite of these rate increases so I would expect to see occupancy growth.

<unk> increased revenue for our Revpar increase as well so.

That's what we're anticipating rolling into 2023.

Great and one final question from me you mentioned that Youre looking at a smaller size acquisitions.

In the home health area I'm, just curious after the final rule came out any changes in the pipeline or in your conversation with.

Potential.

<unk> targets and whether that has changed at all and what do you think the market multiples today.

I appreciate the question and I think.

Our strategy remains the same we've always been focused on some of the small to mid sized providers and then taken advantage of larger opportunities when they presented themselves as far as the pipeline. We're excited about what we have it's pretty robust I would say the change to the final rule is in the process of <unk>.

Some additional folks to make a decision and the fact that there is a little more certainty at least for the 2023 operating environment.

And then some some positive moderation in the rules impact I think will lead to some.

Some of those home health agencies that had been sitting on the sidelines waiting to see what was going to happen to.

To engage and so we're pleased with what's in our pipeline and we're also excited to see.

Is that kind of uptick that we think will come in the wake of the final rule.

Great. Thank you.

Thank you Doug.

Thank you and as a reminder, you can hit Star one if you would like to get in the queue to ask a question.

Standby has our next question queues up our next question comes from Scott Fidel at Stephens.

Hi, Thanks, Hi, everyone.

First question just on.

Interesting can you maybe just unpack some of the dynamics in the hospice.

ADC and Mike <unk> pressure in the third quarter, maybe talk about sort of how.

How much COVID-19 may have impacted adverse either COVID-19 factors and maybe how those stats were exiting the quarter as compared to how they averaged throughout the quarter.

Yeah, Great question and good morning, Scott Thanks for being on.

Our hospice length of stay was softer than what we had originally projected it's one of the drivers behind where we ended the quarter, but we're really pleased with the momentum going into October .

Feels like we are.

We are picking up steam.

I think what is driving that ADC remaining flat as a couple of things one as you mentioned our length of stay declined by about nine days, which is pretty significant for us. The second as we continue to receive an elevated number of referrals from our hospital partners and we're grateful for that but we're also seeing the census at our skilled nursing and assisted living.

<unk> partners continued to increase and so we're optimistic that those settings that often identify the need for hospice a little bit sooner.

As their census rebound, we're going to see.

Increased number of referrals from those trusted partners and so we see sort of that we see that starting to happen those census, starting to increase.

In some of our key partnerships.

We look forward to that bringing us back to a more traditional level of growth you see on the home outside kind of how we've been able to lean into those partnerships produce great quality outcomes and the impact that has had on our on our admissions and our our ADC. We expect the same from our hospice and so it's been a little bit of we've had some ups and downs with.

Length of stay and where our referrals are coming from but the good news is admits have been.

It remains strong the community continues to trust, our local leaders and the excellent care that we provide and that will eventually turn into an increased.

ADC.

Okay got it.

Next question just interested if you can just go into a little more detail on how the the acquisition.

To improve the performance and margins in let's call. It the class of 2021, and 2020 to maybe give us an update on sort of what progress you've seen there then.

How much embedded opportunity you have still remaining in getting those acquisitions up to where you would like to see the margins more traditionally.

Yes, as you know Scott our traditional strategy has been to buy sometime somewhat underperforming assets, whether thats clinically or operationally and to leverage our operating model our approach to local leadership and our operational expertise to improve those what that means is it ends up that some of our quarters are lumpy from a margin standpoint.

As we acquire and integrate those operations I think what we've seen in Q3 and what we're continuing to see is a number of those acquisitions really pick up steam.

An example, I would use as our hospice in Sacramento, which has continued to grow.

Month over month from an ADC perspective from a clinical outcome perspective in a trust in the community perspective and has positioned itself to do.

Additional acquisitions in that market.

That's true pretty much across the board, we're seeing significant improvement.

Site is still huge we've talked a little bit about how those 2020 one acquisitions that occurred during COVID-19.

It was harder and it took longer to implement the changes that we so often implement in order to improve clinical and operational performance.

And that delay sort of backed that up a little bit, but it didn't change our long term opportunity long term opportunity at those operations mirrors those that.

That we have across our platform that has consistently contributed year over year double digit growth and so we're really excited to see those continue to.

Add value enforce to realize what Brent described as the latent potential in our platform Scott the other thing that I would add in there.

This is why we've been focusing so much on developing our leaders.

There's a direct correlation between having a strong leadership team in place at these new acquisitions, and frankly any of our operations and.

The success of financial and clinical success that we can realize and so one of the challenges that we faced during the pandemic.

That pipeline was sort of disrupted for a number of different reasons, our ability to connect and come together and develop and train and all of that was just it wasn't as robust and strong as we've had historically and so thats why were really revamping our efforts to build that leadership pipeline, we talked about the investments that we're making and.

We're confident that as we do this in the right way because this is what we've seen over our history is we have strong talented local leaders at step into these opportunities we very quickly.

Significant growth and so that's what we're building towards that's what we're planning on and that's what we'll continue to focus on so that we can.

Have have better more more quick turnarounds with our new acquisitions and in areas that were struggling continue to drive performance there as well.

Understood and then just one final question for me.

I think it will be helpful. Just just how how you're framing or how youre thinking about the trajectory on home health margins.

For 2023, obviously, there is going to be.

Headwinds here around the 1% rate cut that you're going to have to manage through.

So maybe talk about how you think about wage inflation trending against that and then some of the other levers that you may be able to start Paul to to try to match up.

Sensors too.

That to that rate cut to the best extent possible and Thats. It for me. Thanks.

Yes, Scott the reality is that while the final rule was was a net improvement over the proposed rule. It still wasn't close to what we hoped it would be which is a true recognition of the value of home health in the continuum and the result of that is we've still got operational work to do in order to offset it and the.

Good news is we've been working on that.

Projecting a much larger cut and in the face of this new information, we're able to continue to dial in our operations, we continued to experience relatively high.

Wage pressure in Q3.

Sequentially, we were up about two 2%.

In Q3, and so that's that's ameliorated, but not as quickly as we'd like it to which means that we have to focus on other levers as we continue to be competitive and seek to establish ourselves as the employer of choice in each community that we serve a.

A few of those opportunities still remain in the way we're managing episodes, we still think that we have.

A significant opportunity to manage those episodes more tightly to continue to improve the utilization of mid level staff and to hire more lpns Vms Ptas and coders, who can.

Who can provide those routine visits in an appropriate way and we will continue to monitor and seek to improve those levers. We also have an opportunity. When you look at the type of patients that we're serving.

About 40% of our episodes are early episodes.

And so we see that there is some opportunity to continue to improve our relationships with hospital partners.

And be the provider of.

Of choice for those institutional early referrals as well as for all community referrals and so we see a number of levers to offset that.

Our margin will continue to be lumpy as we go through the acquisition and transition process with new operations, but we do see a continued opportunity for improvement in.

In $2000 in the fourth quarter and into 2023.

Okay. Thank you.

Thank you Scott.

Okay.

Thank you at this time there is no further questions.

Thank you for your participation in todays conference and this does conclude the program you may now disconnect.

Thank you.

Okay.

Thanks.

Sure.

Okay.

Yeah.

[music].

Good day, and thank you for standing by and welcome to the pennant Group Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

We'll then hear an automated message advising your hand is raised please be advised today's conference is being recorded.

Now I'd like to hand, the conference over to your speaker today.

Derek Bunker. Please go ahead.

Yes.

Thank you Cory and welcome everyone. Thank you for joining US today here with me today are Frank Gehry solely our CEO , John Gardner, our president and Jen Freeman, our CFO before we begin I have a few housekeeping matters we filed.

Earnings press release, and 10-Q yesterday.

<unk> is available on the Investor Relations section of our website at Www Dot <unk> Dot com a replay of this call will also be available on our website until five P. M.

On Friday December 19, 2022.

Want to remind anyone that may be listening to a replay of this call that all statements made are as of today November eight 2020.

These statements have not been nor will they be updated subsequent to today's call.

Any forward looking statements made today are based on management's current expectations assumptions and beliefs in 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 results.

Except as required by federal Securities laws.

<unk> do.

We 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 pennant group is a holding company with no direct operating assets employees or revenues.

Certain of our independent subsidiaries collectively referred to as the service center provide accounting payroll HR IC.

Legal risk management and other services to the other operating subsidiaries due contractual relationships with subsidies.

Words tenants, Anthony we our and US for purchase of tenant Group, Inc. And its consolidated subsidiaries all of our operating subsidiaries and 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 an hour and similar terms used today are not meant to imply nor should it be construed as meaning that the pennant group has direct operating assets employees or revenue or that any of the subsidiaries are operated by the SEC.

<unk> our CEO .

Thanks, Derek and welcome everyone to our third quarter 2022 earnings call. Thank you for joining us today to discuss our quarterly results.

Again, I'd like to recognize our frontline workers staff and leaders and tenants.

His sacrifice everyday and provide life changing service across the communities we serve.

As we've detailed over the last several quarters, we continued to build long term foundational strength through several key efforts.

We are focused on recruiting and developing CEO level health care leaders equipped with best practices.

Accelerate our next phase of growth.

Second we are investing in people systems and data tools designed to improve the ability of our local teams to respond to the unique needs of our health care communities.

These are ongoing processes designed to build the engine that will drive outsized performance for many years to come.

This quarter's earnings didn't fully reflect the progress we expected as we navigated continued wage pressures full sequestration and a softer hospice ADC. We're seeing notable progress as measured by revenue admissions occupancy and cash flow and we're seeing strength build in many of our markets in clusters.

We are on track to make significant improvement in the second half of 2022 and are positioned to produce strong results going into 2023.

We have substantial latent potential in our existing operations.

Been improving our cash flow and balance sheet.

And we are beginning to return to the brisk pace of strategic acquisitions that we've executed on for much of our history.

We know where we're going how to get there and we are excited about the progress, we're making toward operational excellence and our ability to generate and deploy cash toward accretive growth and active M&A landscape.

As we mentioned in our press release yesterday.

Inefficient opportunity to drive better earnings as we continue to acquire high quality assets and executed with discipline around our core opportunities.

We look forward to tackling the many strategic and organic growth opportunities before us.

At this point I've asked John Gardner to provide an update on our operational and investment results.

Missions, and a seven 8% increase in hospice submissions each over the prior year quarter.

Our home health revenue grew a strong 16, 5% over the prior year quarter as we continued to lean into our relationships with partners across the communities, we serve and our acquisitions from 2021 continue to mature.

As our average length of stay normalizes.

And our local teams continued strong admissions, we expect our ADC growth to return.

To traditional levels.

Our leaders exercise rigorous cost discipline in the face of significant increases in the cost of labor fuel and other inflation sensitive areas, leading to adjusted EBITDA of $14 2 million.

$1 million or seven 7% above the third quarter 2021.

Those are value proposition to our health system and payer partners.

A new chapter for another operation in the Milwaukee area, where we also have strong leadership, producing exceptional financial and clinical results. The staff and patients of <unk> are in good hands with our local leadership team. We're excited for the budding opportunity inherent in each of these acquisitions.

On the regulatory front.

<unk> recently released the 2023 home health final rule, which included Cms's decision to reduce the behavioral adjustment cuts calculated by half for calendar year 2023. These cuts were also offset by a stronger than originally proposed 4% market basket update based on our claims data.

And run rate.

On 2022, Medicare home health revenue, we expect a net negative impact of approximately 1% and our Medicare home health revenue for 2023, while the final rules negative behavioral adjustments represent a headwind for providers in our industry.

[noise] ago, we're confident we can pull the right levers to continue our growth even in a challenging reimbursement environment.

In our senior living segment, we continued our recovery, but taking a step forward in many key metrics <unk> same store senior living segment revenue of $32 2 million was an increase of $3 4 million or 11, 8% over the prior year quarter, while adjusted EBITDA of $1 five.

Million represents growth of $1 4 million over the prior year quarter year.

Over the prior year quarter in part due to rate increases that went into effect over the summer and better processes for tracking and billing more accurately for the level of care provided.

Mentum, our senior living leaders are generating is demonstrated by occupancy improving 4% and revpar, increasing $87 or two 5% each over the second quarter 2022 on a same store basis.

Levels. However, we know that achieving exceptional operational results starts with talented local leaders and resource support.

And as we've been building our leadership strength in this segment are beginning to see the fruits of that key effort.

Fit our strategic criteria of small to medium sized operations with strong reputations in their communities with significant organic growth potential for our operational expertise and capture that upside for our stakeholders. While we continue to be very disciplined as we look to deploy capital or cash flow is improving.

Thank you John and good morning, everyone.

Detailed financial results for the three and nine months ended September 32022 are contained in our 10-Q and press release issued yesterday.

Our third quarter results were strong.

Our expectation is.

Is it slower than anticipated ramp in our hospice volume and our cost of services impacted by elevated labor.

Quarter.

The three months ended September 32022, we reported total GAAP revenue of $118 four.

$4 million.

Increase of $6 4 million or 7% over the prior year quarter.

GAAP diluted earnings per share of <unk>, 10, and non-GAAP adjusted earnings per diluted share at 14.

An increase of <unk> 10, or 27, 3% over the prior year quarter.

We are pleased to report ongoing strength in our GAAP cash flow from operations for Q3 2022.

$8 1 million.

Also excluding the two announced acquisitions in the third quarter.

Free cash flow, what does that a $5 million in Q3, including $2 6 million of Capex from the business and our community.

This strong cash flow is important as we take a strong balance sheet into a recessionary environment.

So that headwind should present greater acquisition opportunities.

Cited to grow and continue to generate solid cash flow for our stakeholders.

Another key highlight three months ended September 32022 include <unk>.

Seven $5 million drawn on our revolving line of credit and $3 million cash on hand at quarter end.

And 198 times net debt to adjusted EBITDA leverage ratio.

As mentioned in our press release yesterday, we are revising our fiscal year 2020 to annual guidance for revenue between $458 million and $462 million.

Consistent with our prior guidance and how we have measured ourselves all year. This excludes revenues from transferred in newly acquired communities.

Those items added back in our full year revenue.

Would be between $467 million and $473 million.

Additionally, we revised adjusted earnings per diluted share to between 55 and 60.

$33 million of diluted shares.

Adjusted EBITDA was revised to between $31 million and $33 5 million.

Our revised earnings guidance reflects ongoing growth in our home health and hospice admissions and senior living metric.

Offset by a slow slightly slower than anticipated ramp in our hospice ADC.

Related G&A spend related to investments and creating increased efficiencies and systems and processes, including increased focus on cash collection and.

And investments in training and increased number of leaders that will be poised for new opportunity.

With ongoing rate wage pressure in both operating segments and the service Center.

Our staffing inflation and other operating challenges will likely persist for the foreseeable future and continue to create hurdles we have to overcome.

Our leaders across the company are capable of confronting these headwinds and continuing the ramp and performance.

Experienced year to date.

That I'll hand, it to Brent to highlight a couple of our local leaders.

Thanks, Jen, it's my pleasure to spotlight a few leaders in markets in our organization that have achieved remarkable results through operational excellence.

They are the leadership of Ceos and market leaders, Tiffany Marc <unk>, our senior living market covering the state of Wisconsin is experienced in an inspiring turnaround over the past 18 months.

Because of their establishment of and commitment to rigorous adherence to our unique operating model if any in Genie have led the charge to turn on 19, Wisconsin communities.

We're focused on finding and developing key leaders in Wisconsin that elevated our operations leaders like CEO , Tammy Wagner, New Chief Marketing Officer, Christine Gomez clinical market leaders, Michele Dove, and Jamie Campbell and strong future CEO level leaders.

In the third quarter 2022, compared to the prior year quarter. This budding group of talented Wisconsin based leaders and many others have increased revenue by 22, 7% in <unk>.

EBITDA from a negative $350000 to a positive $534000 growing occupancy by six 9% to 88, 5%.

And revenue per occupied room by 11, 2%. Despite one of the most difficult operating environments we've experienced.

In our home health and Hospice segment, a California market is rapidly turning a flywheel of success due to the leadership of CEO , Andrea Doctor, Jordan Baker, and Adam Bone Ccs yesterday, along the Athena Mcmahon and clinical market leader Bill Bradley cluster leaders Nels Lund, Charlie Marine Coe, and Tim Johnson, and many others we can.

Named.

<unk>.

This call hospice in Sacramento, a successful de Novo home health startup in reverse Riverside County, and recently, our hospice and palliative care in the Central Valley in Palm Springs.

In the third quarter of 2022 compared to the prior year quarter. This market increased revenue by 31, 7% in <unk>.

EBITDA.

This group of leaders is showcasing what can be achieved in each of their local operations and together as clusters in markets through the application of our unique operating model.

Before we move to Q&A.

With that we'll open it up for questions.

Okay.

Our first question comes from the line of.

Tao quake from stifle.

Europe .

Hi, good morning, everyone.

My first question is on the guidance could you help us kind of bridge between the third quarter and the fourth quarter I noticed that the guidance suggests kind of a flat top line performance, but it has it been improvement on the on the EBITDA number I know that the hospice ratings going.

Getting raised in that fourth quarter could you help us.

Explain some of the moving pieces between the third quarter into the fourth quarter.

Sure.

There's a couple of different things that are going on.

And actually we're going to experience an increase in revenue. So it may look flat because of the way that we're.

Our revenue guidance, but actually we're reporting an increase in revenue.

Increase in that as well.

Along with our senior living occupancy improving at a similar pace to what it's been.

And we do that.

For GE at G&A to remain at the same percentage a little bit less for the fourth quarter than it occurred.

In Q3.

What about on the expense side do you see any cost moderation in the fourth quarter versus <unk>.

We're assuming a similar cost.

Fourth quarter versus Q3.

A little bit of cost moderation and the increase quarter over quarter.

Then the incremental margin on the senior living occupancy growth will be.

There we can pick up.

Xtra.

<unk> growth because of.

Capital already covering our indirect costs and having the staff that we need for increased occupancy.

<unk> story is relatively small how should we thinking how should we think about the two components going into 2023.

Think about.

Additional recovery in the pricing power you have today.

Yes.

I think what we would expect to see us.

<unk> growth.

On the rate increases right.

We're trying to catch up with some of the inflationary pressures and we've made consistent.

Yes.

Changes in that regard.

Addition to that we're also doing a much better job of managing each of the residents that are coming and understanding the opportunities from a carrier standpoint, and really hitting a full picture of managing both the cost and the revenue opportunities and so as you look into 2023 some of those same levers that we've been pulling.

This year, we would anticipate rolling into 2023.

And we've consistently seen occupancy growth, which is encouraging.

In spite of these rate increases so I would expect to see occupancy growth.

Increased revenue for our Revpar increase as well so.

That's what we're anticipating rolling into 2023.

Great and one final question from me you mentioned that Youre looking at the small and mid size acquisitions.

In the home health area I'm, just curious after the final rule came out any changes in the pipeline or in your conversation with.

Potential.

<unk> targets and whether that has changed at all and what do you think the market multiples today.

I appreciate the question and I think.

Our strategy remains the same we've always been focused on some of the small to mid sized providers and then taken advantage of larger opportunities when they presented themselves as.

As far as the pipeline. We're excited about what we have is pretty robust I would say the change to the final rule is in the process of spurring some additional folks to make a decision and the fact that there is a little more certainty at least for the 2023 operating environment.

And then some some positive moderation in the rules impact I think will lead to.

Some of those home health agencies that have been sitting on the sidelines waiting to see what was going to happen to.

To engage and so we're pleased with what's in our pipeline and we're also excited to see.

Is that kind of uptick that we think will come in the wake of the final rule.

Great. Thank you.

Thank you Doug.

Thank you and as a reminder, you can hit Star one if you would like to get in the queue to ask a question.

Standby has our next question. Our next question comes from Scott Fidel at Stephens.

Hi, Thanks, Hi, everyone.

First question just on.

Can you maybe just unpack some of the dynamics in the hospice.

ADC and Mike <unk> pressure in the third quarter, maybe talk about sort of how.

How much COVID-19 may have impacted that versus other COVID-19 factors Jan and maybe how those stats were exiting the quarter as compared to how they average throughout the quarter.

Yeah, Great question and good morning, Scott Thanks for being on.

Our hospice length of stay was softer than what we had originally projected it's one of the drivers behind where we ended the quarter, but we're really pleased with the momentum going into October .

Feels like we are.

We are picking up steam.

<unk> partners continued to increase and so we're optimistic that those settings that often identify the need for hospice a little bit sooner.

As their census rebound, we're going to see an increased number of referrals from those trusted partners and so we see sort of that we see that starting to happen those census, starting to increase.

In some of our key partnerships and we look forward to that bringing us back to a more traditional level of growth you see on the home health side kind of how we've been able to lean into those partnerships produce great quality outcomes and the impact that has had on our on our admissions and our our ADC.

We expect the same from our hospice and so it's been a little bit of we've had some ups and downs with length of stay and where our referrals are coming from but the good news is admits have been have remained strong. The community continues to trust our local leaders and the excellent care that we provide and that will eventually turn into an increased.

ADC.

Okay got it.

Next question just interested if you can just go into a little more detail on how the the acquisition trying to improve the performance and margins in let's call. It the class of 2021, and 2020 to maybe give us an update on sort of what progress you've seen there and then how much embedded opportunity.

You have still remaining.

And getting those acquisitions up to where you would like to see the margins more traditionally.

Yes, as you know Scott our traditional strategy has been to buy some time somewhat underperforming assets, whether thats clinically or operationally and to leverage our operating model our approach to local leadership and operational expertise to improve those what that means is it ends up that some of our quarters are lumpy from a margin standpoint as.

We acquire and integrate those operations I think what we've seen in Q3 and what we're continuing to see is a number of those acquisitions really pick up steam in.

An example, I would use as our hospice in Sacramento, which has continued to grow.

Month over month from an ADC perspective from a clinical outcome perspective in a trust in the community perspective and has positioned itself, but now do.

Additional acquisitions in that market.

That's true pretty much across the board, we're seeing significant improvement.

Sorry, there's still huge we've talked a little bit about how those 2020 one acquisitions that occurred during COVID-19.