Q4 2022 Ensign Group Inc Earnings Call

February 3, 2023

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Yeah.

Good day and thank you for standing by welcome to the Ensign Group, Inc. Fourth quarter 2022 earnings 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 one on your telephone you hooked in here and ultimate message I've always seen your hands is raised to withdraw your question. Please press star one one again please be advised.

Today's conference is being recorded I will now hand, the conference over to Mr. Keetch.

Thank you and welcome everyone and thank you for joining US today, we filed our earnings press release yesterday and it is available on the Investor Relations section of our website at Ensign group Dot net a replay of this call will also be available on our website until five P. M Pacific on Friday March three 2023.

I want to remind any listeners that may be listening to a replay of this call that all statements are made as of today February three 2023, 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 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 call listeners should not place undue reliance on forward looking statements.

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

As required by federal Securities laws, Ensign and its affiliates 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 Ensign Group, Inc. Is a holding company with no direct operating assets employees or revenues.

Certain of our wholly owned independent subsidiaries collectively referred to as the 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.

And in addition, our wholly owned captive insurance subsidiary, which we refer to as the insurance captive provides certain claims made coverage to our operating companies for general and professional liability as well as for workers' compensation insurance liabilities.

<unk> also own standard better health care, REIT, Inc, which is a captive real estate investment trust that invest in healthcare properties and entered into lease agreements with certain independent subsidiaries of enzyme as well as third party tenants that are unaffiliated with the <unk>.

The words enzyme company, we our and US refer to the Ensign Group, Inc, and its consolidated subsidiaries.

All of our operating subsidiaries the service Center Standard-bearer healthcare REIT and the insurance captive are operated by separate wholly owned independent companies that have their own management employees and assets references here end of the consolidated company and its assets and activities as well as the use of the terms, we us our and similar.

We may use today are not meant to imply nor should it be construed as meaning that the ensign group has direct operating assets employees or revenue or that any of the subsidiaries are operated by the Ensign 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 Form 10-K and with that I will.

Turn the call over to Barry Port our CEO Barry.

Thank you Chad and thank you for joining us today.

We are pleased to announce yesterday another record quarter. These results demonstrate yet again.

<unk> leaders and their teams continue to be the examples of post acute excellence.

Wade through the evolving landscape in each of their markets.

And again achieved record results in spite of the continued disruption in the labor markets.

Remarkably we saw continued improvement in Occupancies skilled revenue and managed care revenues.

We are particularly pleased that we achieved sequential growth in overall occupancy for the eighth consecutive quarter with same store and transitioning operations, increasing by two 9% and four 3% respectively over the prior year quarter.

As of the end of the quarter, our same store occupancy reached 77, 8% and we continue to get closer to our pre COVID-19 occupancy levels, which was at 81% in March of 2020.

We are amazed by the commitment of our caregivers and their continued endurance and strength.

We've also been very pleased with the progress we've made in our improving and improving our skilled mix.

As those that have followed us know growth in skilled mix only happens after our local team has demonstrated over and over again achieved successful outcomes for sicker patients that need more advanced care.

During the quarter, our same store operations grew their skilled mix revenue by nine 1% over the prior year quarter. Additionally.

Additionally, in the wake of the pandemic, there's been a lot of noise around potential shifts to home based care or a lack of support for inpatient post acute services from hospitals and managed care providers, but when compared to pre COVID-19 levels. Our skilled mix has remained elevated showing just how important high quality.

Acute services are within the continuum of care.

We've always been confident that our skilled mix will continue to be strong, but we are very pleased to see this continuous fundamental growth in skilled mix.

It demonstrates the increasing and sustainable demand for skilled post acute services without a significant impact from COVID-19.

We continue to be impacted by the labor environment, but we are very encouraged by the improvement in several key internal performance areas that show that these issues are stabilizing.

For example, we continue to see the rate of wage inflation slowing down as we've experienced two quarters in a row of slower wage growth. In addition, while our use of agency labor is still high higher than we'd like it to be we are encouraged to see several markets, becoming less and less reliant on agency labor in it.

In addition, we also expect that as wage inflation moderates that our need for agency Labor will also continue to decrease.

Lastly, we are also very pleased to see improvements our employee turnover due to our leaders relentless effort to create an employee focused culture that aligns with our collective core values.

Recently, the federal government extended the state of emergency to April 2023, which keeps in place many of the regulatory and other reforms of assistance helpful to patient care.

Additionally, the government has indicated that the phe will end in may of 2023.

We also continue to benefit from S map bolstered Medicaid funding in several states some of which will enter phase out throughout the year. However, this federally supported funding will be replaced in large part with the appropriate state based funding ensuring a relatively smooth transition.

In addition to occupancy growth and continued skilled mix improvement one major aspect.

Of our company's resilience has been and continues to be our local leaders ability to acquire struggling operations and transform them into facilities of choice for their communities.

<unk> ability combined with a strong balance sheet allow us to increase the number of acquisitions, we do in times of uncertainty when many operators are choosing or force being forced to exit the industry.

With 17 acquisitions that we completed on February one we have now added 37 affiliated operations since July one 2022.

We remain confident that our operating model will continue to allow each operator to form their own market specific strategy and adjust to the needs of their local medical communities, including methods for attracting new health care professionals into our workforce and retaining and developing existing staff.

These transitions will take time, particularly given the higher than normal reliance on agency staffing prior to the acquisition.

But with each new operation, we are creating new opportunities for the next generation of leaders and look forward to working together to help each operation reach its enormous clinical and financial potential.

To speak briefly about our ability to execute on the acquisition of a larger portfolio in November we announced that we had agreed to acquire 20, California buildings that had been operated by North American healthcare 17 of which we will operate.

Just two days ago, we closed the transaction and we're very excited and encouraged with how things have gone so far over the last few months. We've had several investors ask us about our ability to execute on larger acquisitions, while reminding us that the last larger deal. We closed was the legend transaction in Texas, which was a similar size.

Those that were following is back in 2016 will remember that the legend transaction took several quarters to produce the results we expected.

We were very open about the lessons, we learned that made that transition a little more challenging than we anticipated, but as we look back we worry we havent done a good enough job at telling the massive success story that the legend operations have become.

Operations have been contributing a significant amount to our earnings for several years now and are currently achieving at least the EBITDAR coverage of two one times to give an even clearer picture the EBITDAR growth from acquisition until the end of 2022 has increased by over 160%.

We certainly made some missteps early on in our approach to the legend acquisition, but even with those short term setbacks, we would not be as strong as we are today in Texas without them and would definitely do that deal over and over again.

I point to this example, not to suggest that we expect the exact same results in this new portfolio I do so only to underline how we look at acquisitions, including larger portfolios, we never acquire something for its short term impact we acquire a single building or 17, if and when we see.

Significant opportunity to create lasting long term value to our portfolio for.

For the last several months, we have been preparing for these additions and have been implementing lessons learned in the <unk> in 2016 and 2017.

All transitions take time, and we expect these will be no different but we're thrilled and grateful to have the opportunity to work together with our new partners and this California portfolio as well as the other geographies and look forward to the contribution they will make to this organization over the next 20 years.

As we evaluate our expanding portfolio, we see more organic growth potential within our existing portfolio than ever before.

As we relentlessly follow and protect the cultural fundamentals that got US here. We are confident that we will continue to consistently produce world class clinical and financial performance.

We are very humbled by what we were able to accomplish in 2022, while dealing with so many unusual challenges.

But we also know we can still do much better and are excited about the potential within our portfolio as we continue to apply our proven locally driven health care model.

We are issuing our annual 2023 guidance earnings guidance of $4 60 to $4 74 per.

Per diluted share and annual revenue guidance of $3 $5 5 billion to 362 billion.

The midpoint of this 2023 earnings guidance represents an increase of 12, 8% over our 2022 results and is 28, 3% higher than our 2021 results.

We are excited about the upcoming year and are confident that our partners will continue to manage and innovate through all of the lingering challenges on the labor front and when we consider the current health of our organization combined with our culture and proven local leadership strategy. We feel we are well positioned to have another outstanding year in 2023.

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Next I'll ask Chad to discuss our recent growth Chad.

Thank you Barry as we expected we continue to add to our growing portfolio and are very excited about the 12, new operations. We added during the quarter. These newly acquired operations include three skilled nursing operations in South Carolina, one skilled nurse nursing operation in Arizona, six skilled nursing operations in Texas and.

Two skilled nursing operations in Colorado totaling an additional 1505 new operational beds.

We always place the highest priority on growth opportunities within our existing footprint and are very excited about the additions to some of our most mature markets like Arizona and Colorado.

Each of these operations, we're very carefully selected and will bolster our ability to fulfill the needs of our health care partners and geographies, we didn't previously or it's simply enhances our service offerings in markets, we have been in for years.

We are also particularly excited about completing our first set of acquisitions in South Carolina. Since we entered that states several years ago. As we said before entering new states is challenging and can often take time to gain the trust of the local health care community. Each of these operations in South Carolina is off to a great start and we hope that we will be able to continue to build the enzyme footprint in the mid Atlantic.

<unk> region.

In addition, we also completed the previously announced acquisition of 20 skilled nursing operations in the state of California that have been operated by North American healthcare.

The real estate assets are all owned by Sabra Health care REIT.

And have been added to our long term triple net master lease with them.

As we said when we announced this transaction last November we are honored that sabra will be entrusting us with the operation of this portfolio and are very excited to expand our growing relationship with them.

These California operations are a perfect fit with our existing footprint in some of our strongest and most mature markets as well as giving us an opportunity to move into the Bay area.

As we evaluated the size and scope of the 'twenty building portfolio. There were three operations located in the Sacramento Sacramento area that we're a geographic outliers for us and.

In addition, given the size and scope of the remaining 17 operations in the amount of resources that are necessary to transaction and transition that many operations at one time, we determined that the best course of action was to partner with another likeminded operator on those three operations.

As of February one and with sovereigns consent, we entered into a sublease for the three Sacramento operations with Aspen healthcare.

And total enzyme affiliates will operate 17 of the 20 buildings, adding 1462 operational beds to enzymes portfolio and Askmen will operate three of the 20 buildings, representing 245 operational beds.

And just a side note the sub leased operations will not contribute to our overall performance.

Aspen is a very reputable operator that currently operates 34 skilled nursing facilities in California.

Have enormous respect for Aspen as an operator and believe that they are in a great position to build on the quality reputation reputation of these buildings already enjoy.

They also have a strong balance sheet and are provided at the company level guarantee of their obligations under the sublease.

As an aside while this is not a situation where we own the real estate as we've discussed for some time now part of our strategy with our internal REIT is to expand our ability to take on larger acquisitions, while sharing part of the portfolio with other talented operators and.

In preparation for future deals standard-bearer REIT had previously engaged in several discussions with Aspen about splitting up a portfolio in a similar way.

So when this opportunity came along the foundation that we had built with Aspen made this a very smooth process.

We look forward to working with them in doing additional deals with Aspen and other operators like them.

As for the 17 facilities that we will be operating our local leaders in California with the support of the service center have been working tirelessly to prepare for this transition.

While the transaction is larger than our typical tuck ins our locally driven approach to acquisitions allows us to rely on the dozens of CEO caliber leaders. We have in these markets to direct the transition of each operation and the same way, we execute a one or two building acquisition.

We are also extremely grateful to sabra for their support during this period.

We have been so impressed with the sovereign team and it's truly a pleasure to work with the real estate partners that really get it.

We also want to thank north American for their cooperation during this very complicated process due to the uniquely public nature of this transaction, we were very grateful to be given early access to these operations during the pre transition phase.

We look forward to working together with the outstanding leaders and teams already in place in these operations to build a strong clinical and build on our strong clinical and operational reputation. They have earned in their communities.

As we evaluate growth from last year.

Which including these recent California acquisitions totaled 46, new operations.

We can see that our discipline is paying off.

While there were literally several hundred opportunities over the last 12 months to 18 months, we remain patient and we're careful to stick to our fundamental growth principles.

As with any transition it will take time for these operations.

To contribute to the bottom line. However, these operations are coming to us with a solid foundation of clinical and operational strength and when combined with an infusion of enzyme cultural and operational principles. We are confident that these operations will thrive and become solid contributors to each of their markets and clusters.

During the year standard bearer added 10, new real estate operations, all of which will be leased to an enzyme affiliated tenant.

And Ensign affiliate entered into 39, new long term leases with third party landlords.

As this recent activity illustrates the ratio between leased and owned will vary depending on the circumstances.

We are first and foremost focused on the operational health of all our acquisitions. So when it makes sense and pricing is right. We will opportunistically purchase of real estate, but at the same time when attractive long term leases come our way we will sign those too.

And as we've shown over our 23 year history, there will be many opportunities to do both.

Looking forward, we are preparing for even more growth in 2023.

While we expect the pace of our closings to slow for the coming months, we continue to see a wide range of large medium size and small portfolios.

The past couple of years have been very difficult for skilled nursing operators and we see evidence of that and low occupancy and high utilization of contract labor and poor clinical and financial health of the facilities that we have recently acquired.

As a result, we still expect that there'll be lots of opportunities that will arise throughout the year.

But as we've said before we will continue to stay true to our strategy of disciplined growth.

And with that I'll turn the call over to Spencer, our COO to add more color around our operations Spencer.

Thanks, Chad as variant chat have indicated an important part of our story has been our local leaders ability to acquire struggling operations and transform them into enzyme caliber operations.

Those of you who are familiar with enzymes history know that our organization was born in challenging times.

And our model has proven time and time again that industry challenges present, great opportunities to innovate and thrive.

While there continues to be significant growth potential in our same store facilities because of recent acquisition growth. The two facility highlights I wanted to share today, our operations and our transitioning category.

These examples illustrate that post acquisition turnaround process that continues to be so fundamental to our long term success.

The first highlight is surprise rehabilitation.

<unk> and Phoenix, Arizona Metro area.

This 100 bed facility was a newbuild that had been shuttered due to the prior owners struggles with local licensing and regulatory authorities.

It was acquired in August of 2019, the facility had no residents and those staff.

With the support of our cluster partners and strong vendor a resource team.

Brian Llorens.

Heather Rucker Executive director, Derek Bowen systematically began building a team and share their vision.

Our vision attracted great health care professionals and soon their senses and reputation we are growing.

The team worked relentlessly on developing high clinical standards and improving staff competency.

As a result, the facility has increased its capacity to successfully treat high acuity patients.

<unk>, those needing ventilators and other respiratory care.

Despite the challenging acuity Heather and her team have attained and maintained a five star overall ratings from CMS as well as a five star score for quality measures.

These clinical accomplishments have been made possible through the surprise teams commitment to creating a unique environment where people want to work.

These efforts not only resulted in reduced staff turnover, but also led to less reliance on agency staff, despite being in an extremely competitive labor environment.

This is employee centric culture also enabled surprise rehab to innovative ways that would've been impossible for most facilities.

For example in 2021 as health care staffing challenges reached a crescendo. The team created a CNA training school that has been recognized as a model throughout Arizona.

This program has already produced over 150, new CNS at surprise and has been duplicated by other incentive affiliates in Arizona to produce over 500 graduates life to date.

With its strong quality outcomes and healthy culture financial outcomes have naturally followed.

For example, the facility ended 2020 at 57% occupancy.

This number grew to 85% in 2021.

And the facility ended 2022, averaging over 95% occupied for the entire year.

With high occupancy and skilled clinical staff. The surprise team was able to fine tune their skilled mix and in Q4 at over 98% skilled days and as you would expect total revenues increased an EBIT improved 73% in Q4 2022 over prior year quarter.

Growing our facility from zero to 95% occupancy is an impressive feat in normal times, but to do it in the midst of a global pandemic and unprecedented health care staffing challenges it's truly incredible.

While the surprise rehab highlight demonstrates the incredible outcomes that are possible and are fully transitioned operation. Our second facility highlight provides a glimpse into a facility that's at an earlier stage in the transition process.

The Oaks at Lakewood has an 80 bed skilled nursing and rehabilitation center located near Tacoma, Washington.

Prior to acquisition in mid 2021. This facility was plagued with physical plant issues historically poor reputation and its community low occupancy and was utilizing large amounts of agency nursing staff.

However, executive director Casey Bradbury, and AUM are Linda casado solve the facility's potential and together with their cluster partners began establishing a positive culture and inspiring hope of what the facility could become.

While there have been many long hard days their diligence and their disciplined and doing the right things has started to pay off.

Today, the opiate liquid is rated four stars by CMS and.

And is gaining the respect of the local provider community.

Turnover is down markedly from 2021 levels and during the last two quarters. The facility has not utilized a single shift of agency labor.

Despite occupancy improving from 79% in Q4 of 2021% to 86% in the fourth quarter.

With skilled Medicare days, improving by 91% during that same period.

This occupancy growth has translated to a 27% revenue increase for Q4 2022 over prior year quarter.

Because of the facility's success and eliminating costly agency staff EBIT has improved 56% over Q4 2021.

While acquisitions are difficult and they require a significant investment from our local operators. These two examples demonstrate just how rewarding the work can be.

We hope that these examples help illustrate some of the many different levers that our local operators are pulling in order to meet the needs of their healthcare continuum partners.

With that I'll turn the time over to Suzanne to provide more detail on the company's financial performance and our guidance Suzanne.

Thank you Spencer and good morning, everyone detailed financials for the quarter and year are contained in our 10-K and press release filed yesterday.

Some additional highlights include the following for the year GAAP diluted earnings per share was $3 95, representing an increase of 15, 5%.

And it just did diluted earnings per share was $4 and 14th.

An increase of 13, 7%.

Consolidated GAAP revenues and adjusted revenues are about three <unk>.

There are two 5 billion an increase of 15, 1%.

GAAP net income was $224 7 million an increase of 15, 4% and adjusted net income was $235 7 million an increase of 13, 8% for the quarter GAAP diluted earnings per share was $1 six an increase of 20.

Three 3%.

And adjusted diluted earnings per share was $1 10, an increase of 13, 5%.

GAAP net income was $60 5 million an increase of 24, 1% and adjusted net income was $62 7 million an increase of 14, 1%.

Other key metrics as of December 31 include cash and cash equivalents of $316 3 million cash flow from operations of $272 5 million.

And $593 million of availability on our revolving line of credit.

We continue to provide additional disclosure on standard bear, which is now comprised of 103 property owned by the company and are leased to 75 affiliated skilled nursing and senior living operations as well as 29.

Senior living operations that are leased to the pennant group.

Each of these properties is subject to triple net long term leases and generated rental revenue of $19 4 million for the quarter of which $15 6 million was derived from the antenna affiliated operations.

Also standard Hubert <unk> 13 million and SSO and had an EBITDAR to rent coverage ratio at two four times.

We continued to Delever, our portfolio achieving a lease adjusted net debt to EBITDA ratio of 198 times a decrease of 213 times from last year. We also own a 108 assets 84 of which are unlevered with significant equity value that provide us with even more liquidity.

During the quarter, we increased our cash dividend to five and three quarter cents per share.

The 20th consecutive annual dividend increase.

Our strength, we plan to continue our 20 year history of paying dividends into the future.

We also wanted to address the current status of the state of emergency in reimbursement matters recently HHS extended the public health emergency for another 90 days separately enhance Aetna funding was approved and will be stepped down through 2023.

Additionally, the White house had made several comments that antenna.

And P&C on May 11, 2023.

As Barry mentioned, we are providing our annual earnings guidance at $4 60.

$4 74 per diluted share and annual revenue guidance of 355 billion to $3 16 billion.

And evaluated multiple scenarios and based on the strength in our performance and the positive momentum, we've seen occupancy and skilled mix as well as some additional strength in Medicaid and managed care programs that gives us confidence that we'll be able to achieve these results.

Our 2023 guidance is based on diluted weighted average common shares outstanding of approximately $57 7 million a tax rate of 25% the inclusion of acquisitions anticipated to close in the first quarter of 2023, the inclusion of management's expectations for Aetna grants Medicare.

And Medicaid.

Funding and reimbursement rates net of provider tax with the primary exclusion coming from stock based compensation.

Other additional factors that could impact quarterly performance include variations in reimbursement systems delays and changes in state budgets seasonality in occupancy and skilled mix the influence of the general economy and census, and staffing the short term impact of our acquisition activities variations in insurance costs surges in COVID-19.

Other factors.

That I will turn it over to Barry Barry.

Thanks, Suzanne we want to again, thank everyone for joining us today and express our appreciation to our shareholders for their confidence and support.

We know that this year will be not without some unique challenges. However, we are encouraged by our operational strength of our core business.

As always we want to recognize our talented field leaders for their heroic efforts along with those of our nurses therapists and other frontline care providers, who continue to provide an industry. Leading example of life enriching service to our residents co workers in our communities.

We're also appreciative to our colleagues at the service Center, who are working tirelessly to support our operations, enabling us to succeed in spite of the challenges we faced thanks for making US better every day, we will now turn the turn it over to the Q&A portion of our call.

Herman can you please instruct the audience on the Q&A procedure. Thank you.

I'm here to ask a question simply press star one on your telephone and wait for your name to be announced could withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

Any comes from the line of Ben Hendrix with RBC capital markets. Your line is open.

Hey, guys. Thank you very much I just wanted to ask you about your skilled mix momentum clearly were seeing evidence of your higher acuity capabilities, but also some COVID-19 respiratory impact in there as well how should we think about steady state mix for your same store portfolio and then from a modeling standpoint, how should we think about skilled mix evolving through the year.

Thank you.

Yes, I'll, just I'll speak generally about it and let Suzanne fill you in on any other insights she has but.

As we compare kind of where we are.

Today from a skilled mix standpoint to where we were both last quarter and last year and even pre COVID-19.

We are pretty confident in the strength that we're building and the momentum that we're building.

Our ability to continue up the acuity of chain and attract.

Attract sicker patients which is.

Ultimately the goal to be the best resource for hospitals and managed care partners.

As always at the forefront of what we're thinking and that means an evolution towards.

Being nimble and adaptive to what their needs are and their needs include ensuring that we have the capability to care for four more acute patient.

So as we look at the impact of Covid. This quarter, certainly it was a little bit higher than the same quarter last year.

But comparable to kind of where we were last quarter.

What we see is that.

Even though there was more COVID-19 activity this quarter there wasn't in the same quarter last year, it's not much and so.

What that indicates to us is on us on a steady state basis.

Even in quarters, where were not really impacted by Covid, we're still fundamentally higher than where we were kind of going into this.

This pandemic.

And that momentum just.

It just continues and so we're encouraged by that.

Is it you want to add to that Suzanne I think you said it really well I think one of the things that we've been noticing for the last couple of quarters is a little bit less dependence on the labor and maybe.

Covid and our skilled mix is and as aligned and so that I think as Barry mentioned I think we're really excited for where we are and the relationships that we've made throughout the entire year with our managed care partners and continue to be strong and as we continue to see that portion of the skilled next job.

Thank you just a quick follow up you've noted that states have been supported supportive of phe roll off in the soft landing there, but is there any cadence quarterly cadence considerations, we need to be thinking about as.

As we think about the second half of the year.

Okay.

Yes, great Great question, obviously, we have the announcement out there on the end of the P&G.

With the whitehouse than leaning towards that that may be in <unk>.

We kind of look through that.

Planning on getting some additional funding through that May date from this data had been supportive.

And as we've talked on previous calls that you've just a reminder, that was California, Arizona and Texas I think on the last call we talked about that California really has.

Broken away from anything to the state of emergency so they've really said that they're going to be supported for the remainder of the year. So feel great about California, Arizona has really thought through this.

And well.

And as they look to put the dollars and more into the right and so we've already starting to see some of that come through in Arizona, and then Texas I think is the last one out there they've kind of done a couple of things <unk> looked at that.

Pte, but they've also done some grants that were expecting to see come in through the year and then as we've talked to you guys about there is that potential that we would have a haul between kind of when the state of emergency and the grants may not cover.

To the end or beginning of September so feel pretty good about how the states are lining up what it's going to be a mix of kind of.

Continued aetna that funding additional funding and then some of these grant programs that we've seen in the states put in place.

What did I Miss.

That's it Ben I mean, ultimately I think as our.

Our guidance indicates we feel pretty strong about even though there are some small unknowns from state to state overall, I think we feel like.

There is a pretty pretty clear pathway for us to not have some massive blips on the state reimbursement front.

As S Matt fades.

Like we mentioned earlier it doesn't really just go away it steps down.

And so.

Even with that step down if there were no like I say it wasn't a bridge in Texas for example.

I don't think that would impact our outlook for the year at all.

That's great guys. Thank you.

Thank you one moment for our next question. Please.

Okay.

And he comes from the line of <unk> <unk> with Stifel. Please proceed.

Hey, good morning, everyone. Congrats on closing our North American transaction.

So Barry I really appreciate a comment on the performance of the legend portfolio.

The North American assets, I think cyber has reported that their EBITDAR rent coverage for these assets have been about one point of load times. So it sounds like these should be accretive on day one.

California asset different from legend typical type of opportunities. If you look at them from either occupancy skilled mix.

Cost saving potentials, and how long do you think.

It would take you to get to stabilization.

And as a follow up could you also comment on the leadership pipeline and the current capacity to come aboard Laura assets.

Yes, that's great great questions Tom.

So.

No.

This portfolio is an excellent one it's one we've.

There was an opportunity to look at it a few years back.

We're excited about them. We know these buildings there there are buildings that we.

Have competed with in the past there are buildings that we have relationships with some of the leaders in.

And so we're really excited about this this portfolio, we think it'll be.

A great addition.

We'll say this is not just about north American but about.

Transitions, we're seeing in general.

Given the labor challenges.

Just globally.

Most buildings and these are no exception have have high amounts of agency labor usage and and so.

More than obviously typical as we're seeing ourselves.

But.

These in particular have had quite a bit and so.

Again like with some of the recent ones we've taken on the pathway for kind of.

A traditional recovery is somewhat hampered there getting agency out of a building.

And in an environment like now is much more difficult as you can imagine.

That's one of the primary challenges that we're facing is just.

Get to where we like to be.

As quick as we need to be.

Is going to be challenged by the current state of labor that said. These buildings are in really good condition clinically and have.

Really good cultural overall I've been able to visit a few already.

I've gotten to know some of the leaders of these buildings and some of the clinicians.

And given that given the clinical stability that exists there I think.

That provides us somewhat of an advantage for us to not say, it's going to take forever.

But it will take some time regardless.

In spite of that but.

Again, like we mentioned in our prepared remarks, we take a long term approach to these we're not we're not afraid of that challenge that exists.

Yes, but we're we're we're going to go about it methodically and do it the right way. The other thing I'll mention too is just from an occupancy standpoint.

The portfolio that we're taking on and.

The low eighty's in terms of percentage for California, that's pretty low.

So that'll be another lever lever, we're going to be focused on.

And then just.

Some other costs.

Issues that we should be able to tackle more readily but that all said.

I don't think were bullish enough to say these will be accretive this year.

But but one never knows hopefully the transition go smoother than we hope it will but we're planning on it being.

In spite of all the challenges I've mentioned that.

We're anticipating these will be.

Kind of on our normal cadence of.

Being successful over the next few quarters.

Leadership.

Further our leadership pipeline perspective Tao.

We have a really strong stable of.

What we call administrators and training, our Ceos and training.

It's as strong as it's ever been in spite of the fact that.

Unemployment is pretty low.

And that's a really good sign.

We probably will be a little more tempered in our path of growth as we digest. These 35 or so buildings, we've taken in the last six months.

As we have been in the past, but we actually inspite of that are geared to be able to take on.

Many more buildings, especially in other geographies, where we havent been as acquisitive lately.

So we will see we will be opportunistic and we will take a tempered approach to that.

But we obviously will have more growth this year for sure, but it will probably come more in the latter half than in the next few months.

Yes, thanks for the color there.

My second question is we noticed that the DSO ticked up a little bit sequentially. I think we also saw that in your 10-K, you updated the risk disclosure around the growth of the Medicaid managed care organization and a potential delay or reduction in Medicare reimbursement. Just curious if you have any general observations about the billing.

Collection trends.

For managed care in general anything worth calling out there.

Yes, great Great question, and a couple of different aspects to that.

Obviously.

The current quarter for Q4, we had a lot of acquisitions and say, what we talked about and just your want to remind people during stages of heavy acquisition.

Anticipated and collections will be slower.

That is just a normal part of doing any acquisitions as we go through that change in ownership process and transferred everything over.

Now as we kind of look for fourth quarter. It was just a little bit slower in general normal and normal basis, as well and that really had to do with a lot of managed care organizations and a couple of states playing a little bit slower than they normally do at the end of the year.

With regards to the risk factor what we added on we did just want to highlight that there are more and more states that are changing from.

Hey.

Direct pay system to a managed care system. So now almost all of our large states are all and managed Medicaid states. When that program goes from just a regular direct pay to managed Medicaid and that payment SKU comes forward to us since they are one of our Big States, California switched.

2023 does that and so we just wanted to give people a heads up that we would expect some slowdown in our Medicaid collections in the state of California due to that transition.

Got you and.

The final question, if I may if I look at the balance sheet, obviously, that's under Levered and you have abundant liquidity and very strong cash flow.

We're forecasting somewhere around $300 million operating cash flow and really $200 million of free cash flow in the next few years.

Curious in terms of capital allocations.

Are those things that you would prioritize.

Know that you have raised the dividend.

The stock repurchase program last year, how should we think about allocating capital.

Yes, I can take that as a chatter certainly.

Acquisitions would be the top of our list.

We see ourselves very much in growth mode, and we will continue to be.

And then obviously.

The capex on the physical plants is another big spend right.

And one note on the cash flows to when we have larger heavier periods of acquisition like we have over the last.

Six months.

That can tend to have a little bit of a drag on our on our cash flows and as we see a climb a little bit with just the nature of licensing.

It's just part of kind of the.

In the process of a transition from one operator to another.

So that will actually probably impact our cash flow a little bit Youll think youll see that.

But yes, I mean as.

As we've talked about.

A lot we keep our balance sheet the way it is.

So that we can be ready when great opportunities arise.

Sure.

As I said in my prepared part of the script I think.

We expect to see additional opportunities coming up.

This year and next and we want to be prepared for that so.

It's how we kind of look at the balance sheet and prepared both on the operating front as well as the standard bearer rate front. So I think as we kind of look at that multifaceted ability to acquire Norbert maybe our number one eastern thanks Glenn.

Okay.

Great. Thank you for taking my questions.

Thank you one moment for our next question. Please.

And it comes from the line of Scott Fidel with Stephens. Please go ahead.

Okay.

Thanks, and hi, everyone actually just wanted to kick back right up on that last topic, just around operating cash flow.

Maybe get a little more visibility into what you're building into your outlook for next year, you've been running in that $275 million area for each of the last two years and then you've talked about in the near term having some of these.

Some of these dynamics just around the acquisitions.

Is it reasonable to think about operating cash flow stepping up a bit in 2023, just given the larger revenue scale or are you assuming it.

Remain relatively stable with where it's been trending.

Last two years that also what you're modeling for for Capex as well.

Yes, great Great question, Scott I think the one thing when you have looking at cash flows and you kind of think through the number of acquisitions that we've done.

Our states can vary between Q4 months.

And 18 months is a long transition that we've ever had as they've got it on and then as you kind of think through where those cash flows go what we try to try to normalize it all in house, but they all come in.

In the middle of that realm, and then after we get that licensing process done and then we have to go through the managed care process and get them re credentialed through at our new licensed under managed care. So that's a secondary step and again that can take.

Two to six months on top of that Opdivo ready weighted and so.

A little bit of a.

Waiting game and so that's why we kind of as you listen to Cabot uses.

Cash one of the things that we'll probably end up having to do with you from networking capital too.

It is through those Chow processes now our hope and we have great systems and great processes that incurs various distinctly and we're on the early end of that but unfortunately, we are at each individual state governments and processing timeline, a little bit here with regards to how quickly it goes through so.

Think it wouldn't be unreasonable to say.

Would expect kind of that same slow net net because <unk> Andrew I just wanted to just a little bit there in California tends to be one of the slower states to yourself.

Texas is faster in California.

Why it will probably be a little more pronounced with this particular set of deals as well and definitely different states have different things. They turn off immediately the Texas turns fill lot more step off immediately until we get that one dollar in the dark and California, there is a little bit.

We get some cash in the door.

And then we have a trough period and then goes back onto every state again.

We're talking to different nuance tier so.

Little bit up and down there.

We haven't talked a whole lot.

Very recently about standard there, but I mean, we have been preparing for this and are still thinking.

A great deal about opportunities for standard bare so.

Having cash availability for deals that again may not fit our operating footprint, but might be good real estate opportunities are something we always wanted to be ready for as well not not signaling that we have anything in the works necessarily but.

But we.

We have great hopes for standard barrier to to have some opportunities as well for growth.

Understood and certainly.

You have tremendous amount of liquidity, but as we're just sort of honing in on I'm trying to model the operating cash flow correctly as it may be is it reasonable for us to think about that those <unk> dynamics persisting over the next quarter or two and then you sort of get more of that cash flow normalization in the back half of the year do you think that that's sort of a reasonable baseline assumption.

I think that that's very small base.

Baseline yeah.

A reasonable baseline assumption knowing that we would get just as much in Q1 as we get in queue.

Q4.

I think it's a reasonable baseline and then we can absolutely guys throughout the year as we are with JC Penney.

<unk> SEC someone extending with regards to the timing of the licensing process, which break now.

Last longer or if they tighten up and making a great great job at the state Senate yes.

You won't see it as pronounced in the cash flow.

Got it and then just my second question.

Just interested if you could give us an update on your managed care contracting.

For 2023, and how <unk> senior managed care rate trends.

Sort of playing out relative to some of the inflationary dynamics than just interested to if you've had a chance to I'm sure you've started that's for sure.

Can you just dig into the managed care contracting.

At the at.

North American facilities, and and whether you see opportunities.

To improve that the managed care rates.

As you as you try to drive synergies off for those acquired properties.

Great.

Question I think when you think through the dynamics that we have we do have.

Some of our larger contracts that we feel really good about and that.

They have recognition that the that labor has increasing overall cost has increased and so we have.

At least one mcf provider.

Is actually recognize that I think a lot of the other <unk> are looking im still struggling with with regards to our overall cost increasing and so they are kind of at their historical rates as a starting point you know anywhere between two and 3% as a starting point, but as we try to demonstrate to them.

The cost increases that we have had I think that theyre start that's the beginning of the negotiation and so <unk> had some really good success with our appeal.

There are some that are a little bit more hold out so I think some of that progress and the negotiation timeline go on a little bit longer because we're all we're asking for rates to increase is higher than <unk> historically done and again, we've been very successful with.

And some of the larger ones and remember we don't have.

For the most part we don't have one contract that covers the entire company, but we really have a lot of smaller contracts to that.

Happens is we won't get wins throughout the year, and then that will kind of come in over the entire period of the year.

Okay, Alright, great. Okay. Thanks.

Thank you and with that we end our Q&A session for today I would like to turn the conference back to Mr. Barry Port for his closing remarks.

Thank you everyone for joining us today, and we look forward to a great year.

Thank you and this concludes today's conference call. Thank you for participating and you may now disconnect.

The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.

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Good day and thank you for standing by welcome to the Ensign Group, Inc. Fourth quarter 2022 earnings 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 this session you will need to press star one on your telephone you Hussein here and ultimate message.

In your hands <unk> Suisse to withdraw your question. Please press star one.

One again please.

Be advised that today's conference is being recorded I would now.

Ill hand, the conference over to Mr. Keetch.

A replay of this call will also be available on our website until five PM Pacific on Friday March three 2023.

We want to remind any listeners that may be listening to a replay of this call that all statements are made as of today February three 2023, and these statements have not been nor will be updated subsequent to today's call.

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

As required by federal Securities laws enzyme and its affiliates 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 Ensign Group, Inc. Is a holding company with no direct operating assets employees or revenues.

Gary, which we referred to as the insurance captive provides certain claims made coverage to our operating companies for general and professional liability as well as for workers' compensation insurance liabilities.

<unk> also own standard bearer health care REIT, Inc, which is a captive real estate investment trust that invest in healthcare properties and entered into lease agreements with certain independent subsidiaries of enzyme as well as third party tenants that are unaffiliated with the enzyme <unk>.

Words enzyme company, we our and US refer to the Ensign Group, Inc, and its consolidated subsidiaries.

All of our operating subsidiaries the service Center Standard-bearer healthcare REIT and the insurance captive are operated by separate wholly owned 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 our and similar.

<unk> is used today are not meant to imply nor should it be construed as meaning that the ensign group has direct operating assets employees or revenue or that any of the subsidiaries are operated by the enzyme <unk>.

I'll turn the call over to Barry Port our CEO Barry.

Thank you Chad and thank you for joining us today.

We are pleased to announce yesterday another record quarter. These results demonstrate yet again that our <unk>.

Local leaders and their teams continue to be the examples of post acute excellence as they wade through the evolving landscape in each of their markets.

And again achieved record results in spite of the continued disruption in the labor markets.

Remarkably we saw continued improvement in Occupancies skilled revenue and managed care revenues.

As of the end of the quarter, our same store occupancy reached 77, 8% and we continue to get closer to our pre COVID-19 occupancy levels, which was at 81% in March of 2020.

We are amazed by the commitment of our caregivers and their continued endurance and strength.

We've also been very pleased with the progress we've made in our improving and improving our skilled mix.

During the quarter, our same store operations grew their skilled mix revenue by nine 1% over the prior year quarter. Additionally.

<unk> services are within the continuum of care.

We've always been confident that our skilled mix will continue to be strong, but we are very pleased to see this continuous fundamental growth in skilled mix.

As it demonstrates the increasing and sustainable demand for skilled post acute services without a significant impact from COVID-19.

We continue to be impacted by the labor environment, but we are very encouraged by the improvement in several key internal performance areas that show that these issues are stabilizing.

In addition, we also expect that as wage inflation moderates that our need for agency Labor will also continue to decrease.

Lastly, we are also very pleased to see improvements our employee turnover due to our leaders relentless effort to create an employee focused culture that aligns with our collective core values.

Recently, the federal government extended the state of emergency to April 2023, which keeps in place many of the regulatory and other reforms of assistance helpful to patient care.

Additionally, the government has indicated that the phe will end in may of 2023.

We also continue to benefit from S. Matt bolstered Medicaid funding in several states some of which will enter phase out throughout the year. However, this federally supported funding will be replaced in large part with appropriate state based funding ensuring a relatively smooth transition.

In addition to occupancy growth and continued skilled mix improvement one major aspect.

Of our company's resilience has been and continues to be our local leaders ability to acquire struggling operations and transform them into facilities of choice for their communities.

This ability combined with a strong balance sheet allow us to increase the number of acquisitions, we do in times of uncertainty when many operators are choosing or force being forced to exit the industry with 17 acquisitions that we completed on February one we have now added 37 affiliated operations since July .

One 2022.

These transitions will take time, particularly given the higher than normal reliance on agency staffing prior to the acquisition.

I want to speak briefly about our ability to execute on the acquisition of a larger portfolio.

In November we announced that we had agreed to acquire 20, California buildings that had been operated by North American healthcare 17 of which we will operate.

Those that were following is back in 2016 will remember that the legend transaction took several quarters to produce the results we expected.

Those operations have been contributing a significant amount to our earnings for several years now and are currently achieving at least the EBITDAR coverage of two one times to give an even clearer picture the EBITDAR growth from acquisition until the end of 2022 has increased by over 160%.

<unk> opportunity to create lasting long term value to our portfolio.

For the last several months, we have been preparing for these additions and had been implementing lessons learned in the <unk> in 2016 and 2017.

As we evaluate our expanding portfolio, we see more organic growth potential within our existing portfolio than ever before as.

As we relentlessly follow and protect the cultural fundamentals that got US here. We are confident that we will continue to consistently produce world class clinical and financial performance.

We are very humbled by what we were able to accomplish in 2022, while dealing with so many unusual challenges.

But we also know we can still do much better and are excited about the potential within our portfolio as we continue to apply our proven locally driven health care model.

We are issuing our annual 2023 guidance earnings guidance of $4 60 to $4 74.

Per diluted share and annual revenue guidance of 355 billion to $3 62 billion.

The midpoint of this 2023 earnings guidance represents an increase of 12, 8% over our 2022 results and is 28, 3% higher than our 2021 results.

Sorry.

Next I'll ask Chad to discuss our recent growth Chad.

Thank you Barry as we expected we continue to add to our growing portfolio and are very excited about the 12, new operations. We added during the quarter. These newly acquired operations include three skilled nursing operations in South Carolina, one skilled nursing operation in Arizona, six skilled nursing operations in Texas.

Two skilled nursing operations in Colorado totaling an additional 1505, new operational that we.

We always place the highest priority on growth opportunities within our existing footprint and are very excited about the additions to some of our most mature markets like Arizona and Colorado.

Each of these operations, we're very carefully selected and will bolster our ability to fulfill the needs of our health care partners and geographies, we didn't previously or it simply enhances our service offerings in markets, we have been in for years.

We are also particularly excited about completing our first set of acquisitions in South Carolina. Since we entered that states several years ago. As we've said before entering new states is challenging and can often take time to gain the trust of the local health care community.

Each of these operations in South Carolina is off to a great start and we hope that we will be able to continue to build the enzyme footprint in the mid Atlantic region.

In addition, we also completed the previously announced acquisition of two skilled nursing operations in the state of California that have been operated by North American healthcare.

The real estate assets are all owned by Sabra Health care REIT.

And have been added to our long term triple net master lease with them.

As we said when we announced this transaction last November we are honored to Sabra will be entrusting us with the operation of this portfolio and are very excited to expand our growing relationship with them.

These California operations are a perfect fit with our existing footprint in some of our strongest and most mature markets as well as giving us an opportunity to move into the Bay area.

As we evaluated the size and scope of the 'twenty building portfolio. There were three operations located in the Sacramento Sacramento area that we're a geographic outliers for us and.

Sacramento operations with Aspen healthcare.

And total enzyme affiliates will operate 17 of the 20 buildings, adding 1462 operational beds to enzymes portfolio and asked them will operate three of the 20 buildings, representing 245 operational beds.

Just a side note the sublease operations will not contribute to our overall performance.

Aspen is a very reputable operator that currently operates 34 skilled nursing facilities in California, we have enormous respect for Aspen as an operator and believe that they are in a great position to build on the quality reputation reputation of these buildings already enjoy.

They also have a strong balance sheet and are provided the company level guarantee of their obligations under the sublease.

In preparation for future deals standard-bearer REIT had previously engaged in several discussions with Aspen about splitting up a portfolio in a similar way so.

So when this opportunity came along the foundation that we had built with Aspen made this a very smooth process. We look forward to working with them in doing additional deals with Aspen and other operators like them.

As for the 17 facilities that we will be operating our local leaders in California with the support of our service center have been working tirelessly to prepare for this transition.

We are also extremely grateful to save for their support during this period.

We have been so impressed with the sovereign team and it's truly a pleasure to work with the real estate partners that really get it.

We look forward to working together with the outstanding leaders and teams already in place in these operations to build a strong clinical and build on the strong clinical and operational reputations. They have earned in their communities.

Sure.

As we evaluate growth from last year.

Which including these recent California acquisitions totaled 46, new operations.

We can see that our discipline is paying off.

While there were literally several hundred opportunities over the last 12 months to 18 months, we remain patient and we're careful to stick to our fundamental growth principles.

As with any transition it will take time for these operations.

To contribute to the bottom line. However, these operations are coming to us with a solid foundation of clinical and operational strength and when combined with an infusion of enzyme cultural and operational principles. We are confident that these operations will thrive and becomes solid contributors to each of their markets and clusters.

During the year standard bare added 10, new real estate operations, all of which will be leased to an enzyme affiliated tenant.

And Ensign affiliates entered into 39, new long term leases with third party landlords.

As this recent activity illustrates the ratio between leased and owned will vary depending on the circumstances.

We are first and foremost focused on the operational health of all of our acquisitions. So when it makes sense and pricing is right. We will opportunistically purchase of real estate, but at the same time when attractive long term leases come our way we will sign those too.

And as we've shown over our 23 year history, there will be many opportunities to do both.

Looking forward, we are preparing for even more growth in 2023.

We expect the pace of our closings to slow for the coming months, we continue to see a wide range of large medium size and small portfolios.

Over the past couple of years have been very difficult for skilled nursing operators and we see evidence of that and low occupancy and high utilization of contract labor and poor clinical and financial health of the facilities that we have recently acquired.

As a result, we still expect that there will be lots of opportunities that will arise throughout the year.

But as we said before we will continue to stay true to our strategy of disciplined growth.

And with that I'll turn the call over to Spencer, our COO to add more color around our operations Spencer.

Thanks, Chad as Barry and Chad have indicated an important part of our story has been our local leaders abilities to acquire struggling operations and transforming them into enzyme caliber operations.

Those of you who are familiar with enzymes history know that our organization was born in challenging times.

And our model has proven time and time again that industry challenges present, great opportunities to innovate and thrive.

While there continues to be significant growth potential in our same store facilities because of recent acquisition growth. The two facility highlights I want to share today, our operations in our transitioning category.

These examples illustrate the post acquisition turnaround process that continues to be so fundamental to our long term success.

The first highlight is surprise rehabilitation.

<unk> in Phoenix, Arizona Metro area.

This 100 bed facility was a newbuild that had been shuttered due to the prior owners struggles with local licensing and regulatory authorities and when.

It was acquired in August of 2019, the facility had no residents and those staff.

With the support of our cluster partners and the strong vendor a resource team.

Oh, Brian Lorenz.

COO, Heather Rucker Executive director, Derek Bowen systematically began building a team that shared their vision.

The revision attracted great health care professionals and soon their senses and reputation we're growing.

The team worked relentlessly on developing high clinical standards and improving staff competency.

As a result, the facility has increased its capacity to successfully treat high acuity patients.

<unk>, those needing ventilators and other respiratory care.

Despite the challenging acuity Heather and her team have obtained and maintained a five star overall ratings from CMS as well as a five star score for quality measures.

Clinical accomplishments have been made possible through the surprise teams commitment to creating a unique environment where people want to work.

These efforts not only resulted in reduced staff turnover, but also led to less reliance on agency staff, despite being in an extremely competitive labor environment.

This is employee centric culture also enabled surprise rehab to innovative ways that would've been impossible for most facilities.

For example in 2021 is health care staffing challenges reached a crescendo. The team created a CNA training school that has been recognized as a model throughout Arizona.

This program has already produced over 150, new CNS at surprise and has been duplicated by other incentives celiac and Arizona to produce over 500 graduates life to date.

With its strong quality outcomes and healthy culture financial outcomes have naturally followed.

For example, the facility ended 2020 at 57% occupancy.

This number grew to 85% in 2021.

And the facility ended 2022, averaging over 95% occupied for the entire year.

With high occupancy and skilled clinical staff. The surprise team was able to fine tune their skilled mix and in Q4 at over 98% skilled days and as you would expect total revenues increase in EBIT improved 73% in Q4 2022 over prior year quarter.

While the surprise rehab to highlight demonstrates the incredible outcomes that are possible and are fully transitioned operation. Our second facility highlight provides a glimpse into a facility that's at an earlier stage in the transition process.

The Oaks at Lakewood has an 80 bed skilled nursing and rehabilitation center located near Tacoma, Washington.

However, executive director Casey Bradbury and AUM are.

Linda Casado solve the facility's potential and together with their cluster partners began establishing a positive culture and inspiring hope of what the facility could become.

While there have been many long hard days their diligence and their disciplined and doing the right things has started to pay off.

Today, the opiate liquid is rated four stars by CMS.

And is gaining the respect of the local provider community.

Turnover is down markedly from 2021 levels and during the last two quarters. The facility has not utilized a single shift of agency labor.

Despite occupancy improving from 79% in Q4 of 2021% to 86% in the fourth quarter.

With skilled Medicare days, improving by 91% during that same period.

This occupancy growth has translated to a 27% revenue increase for Q4 2022 over prior year quarter and because of the facility's success and eliminating costly agency staff.

EIT has improved 56% over Q4 2021.

While acquisitions are difficult and they require a significant investment from our local operators. These two examples demonstrate just how rewarding the work can be.

We hope that these examples help illustrate some of the many different levers that our local operators are pulling in order to meet the needs of their healthcare continuum partners.

With that I'll turn the time over to Suzanne to provide more detail on the company's financial performance and our guidance Suzanne.

Thank you Spencer and good morning, everyone detailed financials for the quarter and year are contained in our 10-K and press release filed yesterday.

Some additional highlights include the following for the year GAAP diluted earnings per share was $3 95.

Presenting an increase of 15, 5%.

And then adjusted diluted earnings per share was $4 in 2014.

An increase of 13, 7%.

Consolidated GAAP revenues and adjusted revenues are about three <unk>.

There are two 5 billion an increase of 15, 1% GAAP.

GAAP net income was $224 7 million an increase of 15, 4% and adjusted net income was $235 7 million an increase of 13, 8% for the quarter GAAP diluted earnings per share was $1 six an increase of 20.

Three 3%.

And adjusted diluted earnings per share was $1 10, an increase of 13, 4%.

GAAP net income was $60 5 million an increase of 24, 1% and adjusted net income was $62 7 million an increase of 14, 1%.

Other key metrics as of December 31 include cash and cash equivalents of $316 3 million cash flow from operations of $272 $5 million and $593 million of availability on our revolving line of credit.

Each of these properties is subject to triple net long term leases and generated rental revenue of $19 4 million for the quarter of which $15 6 million was derived from the enzyme affiliated operations.

Also standard were produced 13 million and SSO and had an EBITDAR to rent coverage ratio at two four times.

We continued to Delever, our portfolio achieving a lease adjusted net debt to EBITDA ratio of 198 times a decrease of 213 times last year. We also own a 108 assets 84 of which are unlevered with significant equity value that provide us with even more liquidity.

<unk>.

During the quarter, we increased our cash dividend to five and three quarter cents per share for the 20th consecutive annual dividend increase.

Given our strength, we plan to continue our 20 year history of paying dividends into the future.

We also wanted to address the current status of the state of emergency and reimbursement matters recently HHS extended the public health emergency for another 90 days separately enhance Aetna funding was approved and will be stepped down through 2023.

Additionally, the White house had made several comments that antenna.

In P&C on May 11, 2023.

As Barry mentioned, we are providing our annual earnings guidance at $4 60 to $4 74 per diluted share and annual revenue guidance of 355 billion to $3 61 billion.

We evaluated multiple scenarios and based on the strength in our performance and the positive momentum, we've seen occupancy and skilled mix as well as some additional strength in Medicaid and managed care program. It gives us confidence that we will be able to achieve these results.

Care and Medicaid.

Funding and reimbursement rates net of provider tax with the primary exclusion coming from stock based compensation.

Other factors.

With that I'll turn it over to Barry Barry.

Thanks, Suzanne we want to again, thank everyone for joining us today and express our appreciation to our shareholders for their confidence and support.

We know that this year will be not without some unique challenges. However, we are encouraged by our operational strength of our core business.

We're also appreciative to our colleagues at the service Center, who are working tirelessly to support our operations, enabling us to succeed in spite of the challenges we faced thanks for making US better every day I will now turn the turn it over to the Q&A portion of our call.

Herman can you please instruct the audience on the Q&A procedure. Thank you.

To ask a question simply press star one on your telephone and wait for your name to be announced could we draw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

Any comes from the line of Ben Hendrix with RBC capital markets. Your line is open.

Hey, guys. Thank you very much I just wanted to ask about your skilled mix momentum clearly were seeing evidence of your higher acuity capabilities, but also some COVID-19 respiratory impact in there as well how should we think about steady state mix for your same store portfolio and then from a modeling standpoint, how should we think about skilled mix evolving through the year.

Year. Thank you.

Yes, I'll just I'll speak generally about it let suzanne fill you in on any other insight she has but.

As we compare kind of where we are.

Today from a skilled mix standpoint to where we were both last quarter and last year and even pre COVID-19.

We are pretty confident in the strength that we're building and the momentum that we're building.

And our ability to continue up the acuity chain and attract.

Attract sicker patients, which which is.

Ultimately the goal to be the best resource for hospitals and managed care partners.

As always at the forefront of what we're thinking and that means an evolution towards.

Being nimble and adaptive to what their needs are and their needs include ensuring that we have the capability to care for four more acute patient.

As we look at the impact of Covid. This quarter, certainly it was a little bit higher than the same quarter last year.

But comparable to kind of where we were last quarter.

What we see is that.

Even though there was more COVID-19 activity this quarter there wasn't in the same quarter last year, it's not much and so.

What that indicates us is on us on a steady state basis.

Even in quarters, where were not really impacted by Covid, we're still fundamentally higher than where we were kind of going into this.

This pandemic.

And that momentum.

It just continues and so we're encouraged by that.

If you want to add to that Suzanne I think you said it really well I think one of the things that we've been noticing for the last couple of quarters is a little bit less dependence on the labors and maybe.

Kevin and our skilled mix is and as aligned and so that and I think as Barry mentioned I think we're really excited for where we are and the relationships that we've made throughout the entire year with our managed care partners and continue to be strong and as we continue to see that proportion of the skilled next job.

As we think about the second half of the year.

Okay.

Yes, great Great question, obviously, we have the announcement out there on the end of the P&G.

With the whitehouse than leaning towards that that May day, and say as we kind of look through that.

Planning on getting some additional funding through that May date from this data had been supportive and as we've talked on previous calls just a reminder, that was California, Arizona and Texas.

On the last call, we talked about that California really has.

Broken away from time anything to the state of emergency.

<unk> really said that they're going to be supportive for the remainder of the year. So feel great about California, Arizona has really thought through this.

And well and as they look to put the dollars and more into the right and so we are already starting to see some of that come through in Arizona, and then Texas I think is the last one out there.

They've kind of done a couple of things they've looked at that.

Peak EBIT they've also done some grants that were expecting to see come in through the year and then as we've talked to you guys about there is that potential that we would have a haul between kind of when the state of emergency and the grants may not cover.

To the end or beginning of September so feel pretty good about how the states are lining up what it's going to be a mix of kind of.

Continued asking that funding additional rate funding and then some of these grant programs that we've seen in the states put in place.

Sorry, what did I Miss.

I think that's it Ben I mean, ultimately I think as our.

Our guidance indicates we feel pretty strong about even though there are some small unknowns from state to state overall, I think we feel like.

There is a pretty pretty clear pathway for us to not have some massive blips on the state reimbursement front.

Matt fades.

And like we mentioned earlier it does it really just go away it steps down.

So.

Even with that step down if there were no like I say it wasn't a bridge in Texas for example.

I don't think that would impact our outlook for the year at all.

That's great guys. Thank you.

Thank you one moment for our next question. Please.

Yeah.

And he comes from the line of <unk> <unk> with Stifel. Please proceed.

Hey, good morning, everyone. Congrats on closing the North American transaction.

So Barry I really appreciate a comment on the performance of the legend portfolio.

So on the North American assets I think <unk> has reported that their EBITDAR rent coverage for these assets have been above one times.

These should be accretive on day one.

California asset different from legend or your typical type of opportunities. If you look at them from.

Either occupancy skilled mix or cost saving potential and how long do you think.

It would take you to get to stabilization.

And as a follow up could you also comment on the leadership pipeline and the current capacity to take on board.

<unk>.

Yes, that's great.

Great questions Tom.

No.

This portfolio is an excellent one it's one we've.

There was an opportunity to look at it a few years back.

We're excited about it then we know these buildings there are buildings that we.

We have competed with in the past there are buildings that we have relationships with some of the leaders in.

So we're really excited about this this portfolio, we think it will be.

A great addition, I will I will say this is not just about North America, but about.

Transitions, we're seeing in general.

Given the labor challenges.

Just globally.

Most buildings and these are no exception.

Have high amounts of agency labor usage and and so on.

More than obviously typical as we're seeing ourselves.

But.

These in particular have had quite a bit and so.

Again like with some of the recent ones we've taken on the pathway for kind of.

A traditional recovery is somewhat hampered there getting agency out of a building.

And in an environment like now is much more difficult as you can imagine so that's one of the primary challenges that we're facing is just to get to where we like to be.

As quick as we need to be is going to be challenged by the current state of labor that said. These buildings are in really good condition clinically and have.

Really good cultural overall I've been able to visit a few already.

Now some of the leaders of these buildings and some of the clinicians.

And given that given the clinical stability that exists there I think.

That provides us somewhat of an advantage for us to not say, it's going to take forever.

But it will take some time regardless.

In spite of that.

Again, like we mentioned in our prepared remarks, we take a long term approach to these we're not we're not afraid of that challenge that exists.

Yes.

We're we're we're going to go about it methodically and do it the right way. The other thing I'll mention too is just from an occupancy standpoint.

The portfolio that we're taking on sits in the low <unk> in terms of percentage for California, that's pretty low.

So that'll be another lever lever, we're going to be focused on.

And then just some just some other cost.

Issues that we should be able to tackle more readily but that all said.

I don't think were bullish enough to say these will be accretive this year.

But but one never knows hopefully the transition go smoother than we hope it will but we're planning on it being.

In spite of all the challenges I've mentioned.

We're anticipating these will be.

Kind of on our normal cadence of.

<unk>.

Being successful over the next few quarters leadership.

For the leadership pipeline perspective Tao.

We have a really strong stable of what.

What we call administrators and training, our Ceos and training.

It's as strong as it's ever been.

Spite of the fact that unemployment is pretty low.

And that's a really good sign.

We probably will be a little more tempered in our path of growth as we digest. These 35 or so buildings, we've taken in the last six months.

As we have been in the past, but we actually.

Part of that are geared to be able to take on.

Many more buildings, especially in other geographies, where we havent been as acquisitive lately.

So we'll see we'll be opportunistic and we will take a tempered approach to that.

But.

We obviously will have more growth this year for sure, but it will probably come more in the latter half than in the next few months.

Yes, thanks for the color there.

<unk> trend and therefore managed care in general anything worth calling out there.

Yes, great Great question, and a couple of different aspects to that.

Obviously.

In the current quarter for Q4, we had a lot of acquisitions and say, what we talked about and just your want to remind people during stages of heavy acquisition.

<unk> paid it and collections will be slower.

It's just a normal part of doing the acquisitions as we go through that change in ownership process and transferred everything over.

As we kind of look for fourth quarter. It was just a little bit slower in normal and the normal basis, as well and that really had to do with a lot of managed care organizations and in a couple of states playing a little bit slower than they normally do at the end of the year.

With regards to the risk factor what we added on we did just want to highlight that there are more and more states that are changing from a.

Direct pay system to a managed care system now.

Now almost all of our large states are all and managed Medicaid states.

And that program goes from just a regular direct pay to managed Medicaid and that payment SKU comes forward to us since they are one of our Big States, California switched.

'twenty three to that and so we just wanted to give people a heads up that we would expect some slowdown in our Medicaid collections in the state of California due to that transition.

Got you and.

The final question, if I may if I look at the balance sheet, obviously, that's under Levered and you have abundant liquidity and very strong cash flow, we're forecasting somewhere around $300 million operating cash flow and really $200 million of free cash flow for the next few years.

I was just curious in terms of capital allocation what are the things that you would prioritize I'd note that you have raised the dividend you had a stock repurchase program last year, how should we think about where we allocate capital.

Yes, I can take that as a chatter certainly acquisitions would be the top of our list.

We see ourselves very much in growth mode, and we will continue to be.

And then obviously.

Capex on the physical plants is another big spend right.

And one note on the cash flows to when we have larger heavier periods of acquisition like we have over the last <unk>.

Six months.

That can tend to have a little bit of a drag on our on our cash flows and as we see a climb a little bit with just the nature of licensing and.

It's just part of kind of the.

In the process of a transition from one operator to another.

So that will actually probably impact our cash flow a little bit Youll think youll see that.

But yes, I mean, as we've talked about.

What we keep our balance sheet the way it is.

So that we can be ready when the great opportunities arise.

As I said in my prepared part of the script I think.

We expect to see additional opportunities coming up.

This year and next and we want to be prepared for that so that's how we kind of look at the balance sheet and prepared both on the operating front as well as the standard bearer rate front. So I think as we kind of look at that multi faceted ability to acquire Marvin definitely maybe our number one.

This is Glenn.

Okay great.

Great.

Thank you for taking my questions.

Thank you one moment for our next question. Please.

And it comes from the line of Scott Fidel with Stephens. Please go ahead.

Okay.

Thanks, and hi, everyone actually just wanted to kick SaaS right up on that last topic, just around operating cash flow and.

Maybe get a little more visibility into what Youre building into your outlook for next year, you've been running in that $275 million area for the last two years and then you've talked about in the near term having some of these.

Some of these dynamics just around the acquisitions.

Is it reasonable to think about operating cash flow stepping up a bit in 2023, just given the larger revenue scale or are you assuming it remained relatively stable with where it's been trending.

The last two years and then also what you're modeling for for Capex as well.

Yes, great Great question, Scott I think the one thing when you are looking at cash flows.

I think through the number of acquisitions that we've done are.

Our states can vary between Q4 months.

And 18 months is a longer transition that we've ever had as they've got it on and then as you kind of think through where those cash flows go what we tried to try to normalize it all and hope that they all come in now.

Two to six months on top of that Opdivo ready weighted and so it's a little bit of.

Waiting game and so that's why we kind of as you listen to Cabot uses.

Cash one of the things that we'll probably end up having to do Jason networking capital too.

It is through those Chow processes now our hope and we have great systems and great processes that it goes very succinctly and Miranda.

Early end of that but unfortunately, we are at each individual state governments and processing timeline, a little bit here with regards to how quickly. It goes through so I think it wouldn't be unreasonable to say.

Would expect kind of that same slow net net because ah well grow Andrew I, just wanted to just a little bit there in California tends to be one of the slower states to yourself.

Texas is faster in California.

That's why it will probably be a little more pronounced with this particular set of deals as well and definitely different states have different things. They turn off immediately the Texas turns fill out more step off immediately until we get not a dollar in the door and California, there is a little bit.

We get some cash in the door and then have a trough period and then goes back onto every state again.

We're talking to different nuance tier so.

Little bit up and down there.

We haven't talked a whole lot.

Very recently about standard there, but I mean, we have been preparing for this and are still thinking.

A great deal about opportunities for standard bare so.

But we.

We have great hopes for standard barrier to have some opportunities as well for growth.

Understood and certainly you have tremendous amount of liquidity, but as we're just sort of honing in on I'm trying to model the operating cash flow correctly as it may be.

The ballpark to think about that those <unk> dynamics.

Shifting over the next quarter or two and then you sort of get more of that cash flow normalization in the back half of the year do you think that that's sort of a reasonable baseline assumption I think that the baseline.

Baseline.

A reasonable baseline assumption knowing that we get just as much in Q1 as we get in Q4 I'm.

Im sorry, I think it's a reasonable baseline and then we can absolutely you guys throughout the year as we are with JC that cash coming in or if we see someone extending with regards to the timing of the licensing process, which break now.

Longer or if they tighten up and making a great great job with the states.

You won't see it as pronounced in the cash flow.

Got it and then just my second question.

Just interested if you could give us an update on your managed care contracting.

For 2023, and how <unk> senior managed care rate trends.

Sort of playing out relative to some of the inflationary dynamics than just interested you if you've had a chance to I'm sure you've started that's for sure.

Dig into the managed care contracting.

At the at the North American facilities.

And whether you see opportunities.

To improve that the managed care rates.

As you as you try to drive synergies off of those acquired properties.

Great. Another great question I think when you think through the dynamics that we have we do have.

Half.

Some of our larger contracts that we feel really good about that.

They have recognition that the that labor has increasing overall cost has increased and so we have.

At least one MTM provider is actually recognize that I think a lot of the other <unk> are looking im still struggling with with regards to our overall cost increasing and so they are kind of at their historical rates as a starting point anywhere between two and 3% as a starting point, but no.

As we try to demonstrate to them the cost increases that we have had.

I think that that's the beginning of the negotiation and so <unk> had some really good success with the appeal.

There are some that are a little bit more called out. So I think some of that progress and the negotiation timeline go on a little bit longer because we're all we're asking for rates to increase is higher than they've historically done and again, we've been very successful with.

Some of the larger ones and remember we don't have.

For the most part we don't have one contract that covers the entire company, but we really have a lot of smaller contracts to that.

What happens is we won't get went throughout the year and then that will kind of come in over the entire period of the year.

Okay, Alright, great. Okay. Thanks.

Thank you and with that we end our Q&A session for today I would like to turn the conference back to Mr. Barry Port for his closing remarks.

Thank you everyone for joining us today, and we look forward to a great year.

Thank you and this concludes today's conference call. Thank you for participating and you may now disconnect.

Q4 2022 Ensign Group Inc Earnings Call

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