Q2 2023 The Pennant Group Inc Earnings Call
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Good day, and thank you for standing by and welcome to the pennant group second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one one on your telephone you will then hear an unabated mess.
Advising your hand is raised to remove yourself from the queue. Please press star one again, please be advised for today's conference is being recorded I would now like to hand, the conference over to Kirk Cheney Corporate Secretary. Please begin.
Thank you Norma welcome everyone and thank you for joining US today here with me today I have been Gary <unk>, our CEO , John Gardner, our president and CEO and Ron <unk> our.
Our CFO before we begin I have a few housekeeping matters.
We filed our earnings press release and 10-Q yesterday.
And is available on the Investor Relations section of our website at Www Dot pennant group Dot Com a replay of this call will also be available on our website until five P. M.
On August eight 2024.
I want to remind anyone who may be listening to a replay of this call that all statements are made as of today August nine 2023, and these statements have not been nor will they be updated after today's call.
Also any forward looking statements made today are based on management's current expectations assumptions and beliefs about our business and the environment in which we operate these statements are subject to risks and uncertainties that could cause our actual results to materially materially differ from those expressed or implied on today's call.
<unk> 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, 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.
For any other reason.
In addition, the pennant group incorporated as a holding company with no direct operating assets employees revenues certain of our independent subsidiaries collectively referred to as the service center provide accounting payroll human resources information technology legal risk management and other services to the operating subsidiaries through contractual relationships with such subsidiaries.
Yes.
The words pennant company, we our and US refer to the pennant group incorporated and its consolidated subsidiaries.
All of our operating subsidiaries and the service center are operated by a 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 are and similar terms used today are not meant to imply nor should it be construed as meaning that the pennant group, Inc. Has direct operating assets employees or revenue or that any of the subsidiaries are operated by the pennant group.
Also we supplement our GAAP reporting with non-GAAP metrics when 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 on upon to the exclusion of GAAP reports.
The GAAP to non-GAAP reconciliation is available in yesterday's press release and is available in our 10-Q.
With that I will turn the call over to Brent <unk>, our CEO Brent.
Thanks, Kurt and welcome everyone to our second quarter 2023 earnings call to begin I would like to recognize and thank our incredible frontline partners across dependent footprints, who are committed each day to providing life changing service to our patients residents and clients.
We are here because of you and appreciate your consistent contributions.
We are pleased to report that Q2 was a solid execution quarter collectively our Q2 consolidated results reflect revenue of $132 3 million, an increase of $16 million or 13, 7% over the prior year quarter.
Adjusted EBITDA of $10 1 million significantly outpaced revenue growth with an increase of $2 5 million or 32, 3%.
Over the prior year quarter, and adjusted EPS of <unk> 18, an increase of <unk> were 28, 6% over the prior year quarter.
This progress is largely due to our concentrated efforts and rigorous commitment to the five key focus areas, we discussed last quarter leadership development.
And bottom line growth clinical excellence and employee experience.
As a result, we are.
Generated significant growth in all business lines improved margins reduced turnover and achieved strong clinical outcomes.
Thats on track with 2023 earnings guidance.
Our senior living segment made remarkable progress in the quarter.
As our segment adjusted EBITDAR increased 33, 2% over the prior year quarter, and 14, 1% sequentially and segment adjusted EBITDA increased 277, 4% over the prior year quarter.
58, 5% sequentially, our senior living results demonstrates the power of our model and the importance of local leadership with strong cluster support.
And our cluster support we mean peer support which enhances leadership development and execution at the local level.
The turnaround in this business truly is a leadership story.
In 2021, our senior living business was that a nadir as many of our local leaders struggled to embrace and harness the power of our unique operating model.
One by one new leaders were added existing leaders transformed clusters rebuilt and collectively we deepened our commitment to our core values and our operating model.
Now this segment is entrepreneurial local leaders, who function like owners and strong clusters.
Dave on peer accountability.
The senior living business now has a deep bench of current and future leaders and contributes meaningfully to our earnings.
We are also trying to grow affiliate opportunistically to further unlock the latent potential that has existed in this platform since our spinoff in 2019.
Our model continues to demonstrate its effectiveness in our home health and hospice segment as well.
Last quarter, we discussed the census pressures, we experienced to begin the year from a reduction in our home health Medicare reimbursement rate.
These headwinds are home health and hospice segment, adjusted EBITDA increased $1 2 million or nine 2% over the prior quarter and segment adjusted EBITDA margin improved 70 basis points.
We are pleased with this progress and also see opportunity to continue to build momentum.
With that said, let me take a moment to comment on the home health proposed rule.
Disappointed in CMS is aggressive cuts to home health reimbursement.
Which contrast, with more nuanced treatment of other post acute care services and risks dramatically reducing access to critical care in the most cost effective healthcare setting as providers are still facing staffing pressures and rising costs.
Together with partners throughout the industry, we look forward to working with CMS and the legislative branch to pursue to pursue solutions that work better for beneficiaries and providers.
Our commitment to leadership development remains our top priority.
As we discussed last quarter, we are diligently focused on developing a robust pipeline of exceptional leaders, who will make us better and drive our future growth.
We have made tremendous progress in these efforts and our leadership bench in both business lines is as strong as it has ever been.
We are also on the way to achieving our goal of developing 100, local Ceos as well as dramatically increasing the total number of C level leaders over the next several years as we explained last quarter.
To earn the title of CEO , our leaders must not only achieve extraordinary clinical outcomes culture and growth, but also drive significant financial improvement in their operations.
Aggress in this key initiative is essential and will be the foundation upon which our growth and success will thrive for many years to come.
While we are pleased with this progress in each of the five key initiatives, we remain laser focused on driving bottom line improvement.
No the entrepreneurial leaders to exercise discipline and diligence in their operations and deliver exceptional results in all types of macroeconomic cycles and rate environments.
Many of our local leaders are doing just that and their efforts are showing in the bottom line and.
In Q2, our adjusted EBITDA margin improved on a consolidated basis to seven 8% from six 6%, a 120 basis point increase over the prior year quarter, and a 140 basis point increase sequentially.
We're encouraged by the overall improvement that we recognize there remains significant upside opportunity.
We continue to appropriately drive bottom line improvement by carefully managing utilization staff productivity.
Optimizing service line and reimbursement mix and urgently addressing underperforming operations.
Finally, we.
We are excited to see movement on the acquisition front, we have completed multiple transactions in <unk>.
Both segments in the first half of the year.
With the growth of our leadership bench.
And a robust pipeline of attractive acquisitions, we are poised to unlock the potential of our future leaders through our disciplined growth strategy.
With that I'll turn the call over to John to provide more detail on our second quarter operational results.
Thank you Brent and good morning, everyone. We are pleased to report solid performance with existing untapped potential in both operating segments, our home health and hospice business experienced significant growth with revenue of $95 million, an increase of $9 7 million or 11, 3% over the prior year quarter.
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Our census progress was highlighted by robust growth in our hospice programs, where revenue increased 18, 3% admissions grew nine 6% and average daily census increased nine 1% each over the prior year quarter. Our home health business also continued its steady growth as home health revenue increased five.
Five 4% Medicare home health admissions grew three 6% and total home health admissions improved three 8% each over the prior year quarter segment, adjusted EBITDA of $14 4 million decreased by $1 million or 1% over the prior year quarter. This decrease is a result of calculated <unk>.
<unk>, an additional segment level leadership to accelerate growth and continued but abating margin pressure from labor cost increases. In addition, the negative reimbursement impact of the home health final rule and the re implementation of sequestration together had a negative impact of approximately $1 $1 million.
We have started to see the benefits of our investment in leadership and the growth described above and in sequential margin improvement over the prior quarter home health and hospice.
Adjusted EBITDA margin improved to 15, 5%.
70 basis point increase in segment, adjusted EBITDA improved $1 2 million or nine 2% each sequentially over the first quarter.
Our focus on clinical outcomes continues to yield strong results with hospitalization rates star ratings, and hospice quality composite scores significantly above national and community averages in Q2, our percentage of home health agencies with the star rating above four increased to 80% versus 77% and the <unk>.
Prior quarter strong clinical outcomes drive growth.
Hence our ability to enter and deepened preferred provider relationships with acute care systems and other key referral sources and positions us to see positive adjustments to our home health revenue through CMS home health value based purchasing program.
In addition, our clinical performance has resulted in opportunities to renegotiate contract rates with existing payer partners that more accurately reflect the cost of providing care and to establish new relationships with managed care payers, who see our excellent clinical outcomes geographic diversity and effective and efficient care delivery.
As a necessary part of their provider networks. We are just now beginning to experience the impact of these efforts as our managed care visits are up five 1% and revenue per visit is up four 9% each over the prior year quarter.
As we've done on the operations side, we will continue to invest in clinical leadership and improved systems to support our local leaders and clusters in driving extraordinary outcomes.
On the regulatory front.
<unk> released the 2020 for hospice final rule, which included a final payment update of three 1% and will result in an estimated two 8% increase in reimbursement per day for us in.
In late July CMS also issued the 2024 proposed home health rule, which applies a net five 1% total permanent behavioral adjustment for all payments offset by a market basket update of two 7% a yield a proposed aggregate net reduction of two 2% in Medicare fee for service payments in 2020.
For these behavioral adjustments are in addition to the adjustments contained in last year's final rule.
<unk> cuts and the proposed rule combined with the significant increase in costs, we've experienced over the last few years risk reducing access to quality services and creating.
And create significant uncertainty for providers in our industry, while another disruption to the industry is unwise and unwelcome tenant began in and has thrived through periods of difficulty much like today. Thanks to the scalability of our locally led operating model strong and flexible balance sheet and opportunistic approach to liquids.
<unk> growth, even as we work closely with industry partners to change the rule, we will stop fully prepare for the potential impacts should it be finalized much like the change to reimbursement with Tdm, we are confident in our ability to pull the right levers and continue to create long term value even in an ever changing reimbursement environment.
As Brent described at the beginning of this call our senior living business has undergone a remarkable transformation over the last two years and we see it continuing to build momentum throughout the remainder of 2023, our local leaders and dedicated resource partners continue to push on every facet of the business, which is showing in the financial results.
Senior living segment revenue of $37 3 million is up 23% over the prior year quarter and five 3% sequentially as our leaders grew revenue and vigorously manage costs in Q2 senior living adjusted EBITDA margin increased to nine 8% from six 5% a 330 basis point increase.
<unk> over the prior quarter and segment adjusted EBITDA increased 58, 5% sequentially and 277, 4% over the prior year quarter.
Pieces are in place for this ramp to continue as same store occupancy mirrors pre pandemic levels at 79, 6% up 240 basis points over the prior year quarter and average revenue per occupied room is up 13, 2% over the prior year quarter.
We also continued to make important investments in our finance.
And other service center teams to support our growth throughout 2023, our leaders of carefully manage these investments to correspond with our revenue growth, allowing us to achieve improved scale in our adjusted G&A expense in Q2, adjusted G&A as a percentage of revenue was six 1% down from six eight.
Sent in Q2 of 'twenty, two and below our internal target, while G&A will fluctuate with the needs of the organization. We are pleased that our leaders have applied the same rigor in this service center that we expect in the field to outperform our internal targets <unk>.
During the quarter, we continued to execute on our long term growth strategy by acquiring two strategically attractive operations within our existing footprint.
In May we acquired benefit home health care and benefit by your side, our home health and home care agency located in Colorado Springs, Colorado. This.
<unk> complements our existing footprint in Denver, and southwest, Colorado deepening our Colorado continuum in June we acquired Blue Bird Health home health Hospice and homecare provider in the Boise, Idaho market.
Bluebird is a critical part of the treasure Valley health care ecosystem.
Our health and deep community relationships make it a strategic acquisition and our core operating market its shares with our service center existing home health and hospice operations and our recently acquired assisted living operation.
With our cash flow from operations continuing to improve as Lynette, we'll describe plenty of dry powder in our revolver and a robust flow of meaningful acquisition opportunities in both segments, we see significant opportunity for growth.
As we have stated before our growth is not the result of arbitrary goals for capital deployment, we focus first on the who making sure that we have the right operational and clinical leadership to make an impact on new community or market with the growth of our leadership pipeline, we are well positioned to step into new operations and successfully improved our clinical pulse.
<unk> and financial results, while our pipeline for new acquisitions is more robust than it has been in several years. We were we will remain extremely disciplined in our capital allocation.
Prioritizing investments, where we have healthy clusters in markets or opportunities for strategic partnerships are pricing that makes sense for the long term health of our organization with that I'll hand, it over to limit for a review of the financials limit.
Thank you John and good morning, everyone detailed financial results for the three months ended June 32023 are contained in our 10-Q and press release filed yesterday.
For the quarter ended June 32023, we reported total GAAP revenue of $132 3 million, an increase of $16 million or 13, 7% over the prior year quarter. We also reported GAAP diluted earnings per share of <unk> at 200% increase over the prior year quarter and non-GAAP .
Diluted earnings per share of <unk> 20.
28, 6% increase over the prior year quarter. These results are consistent with our full year 2023 guidance, which we are reaffirming at this time.
Key metrics for the three months ended June 32023 included.
$65 million outstanding on our $150 million revolving line of credit.
And $2 8 million in cash on hand at quarter end.
Ended Q2, with a 157 times net debt to adjusted EBITDA leverage ratio and cash flows provided from operations of $6 5 million for the quarter.
We expect cash flow from operations to remain healthy throughout 2023, which reflects robust organic revenue growth solid cash collections and continued bottom line improvement.
Our strong operating cash flows enable us to respond opportunistically.
Potential acquisitions, while maintaining a healthy balance sheet.
Since joining the organization I have seen how the focus on developing entrepreneurial local leaders has driven a significant change in both topline and margin performance in both segments.
In addition, the culture that our leads meters infuse and are in their operations has been a driver for change and reducing turnover improving employee satisfaction and producing strong clinical outcomes I'd like to hand, it back to Brent to highlight some of our local leaders that exemplify this culture and strong operational performance.
Brent.
Thanks, Lynette, it's my pleasure to spotlight, a few leaders and teams in our organization who have achieved exceptional results.
Citrus Hills assisted living in Orange, California.
<unk> director and future CEO .
<unk> bug wire and wellness director and future CW Oh gosh.
Garcia driven impressive growth and success.
Since stepping into their roles in 2022 at sea and have established a culture of clinical excellence and resident satisfaction and has resulted in citrus hills occupancy increasing from 74, 2% in Q2 2022 to 96, 7% in Q2 2023 as.
As a community increasingly turns to citrus hills as a trusted provider of assisted living service.
Actual performance followed with a two five times increase in revenue and an incredible 46, five times increase in EBITDAR over the prior year quarter.
In the Bay area.
So Jordan Baker and newly appointed CEO <unk>.
Established Sequoia home health and hospice is a provider and employer of choice in their local market.
Since becoming the executive director at Sequoia in early 2019, Jordan has led a remarkable seven times improvement in revenue.
And 221 times improvement in earnings. In addition, current revenue grew 36, 3% and earnings earnings grew 30 72, 6% over the prior year quarter.
At the same time Sequoia has demonstrated strong clinical results with the real time home Health Star rating of five stars.
Because people are the foundation of its consistent performance and the part of that success is in the continued development of elevation of key leaders from within the operation.
All of this growth and development comes while enjoying one of the highest in place satisfaction scores in the company.
Both of these stories are tremendous examples of the power of our leadership model at work.
Rig flow to these leaders for owning in leading their operations in a way that benefits patients residents employees and community partners.
With that we'll open it up for questions.
Can you please instruct the audience on the Q&A procedure.
Okay.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press star one again, please wait for your name to be announced please standby, while we compile the Q&A roster.
One moment for your first question. Please.
Comes from the line of Raj Kumar with Stephens. Your line is now open.
Hi, Good morning. This is Raj on for Scott Fidel.
Just wanted to kind of go through senior living.
Can you just talk to how much elasticity upside there is given the sequential rate bump.
But we saw a sequential decline in total occupancy.
Overall, we saw industry level and occupancy increased sequentially. So just kind of wanted to parse out what were the key drivers when it came to dependent operation given the slight sequential occupancy down trend in the quarter.
Yes, and I think when you are referencing sequential occupancy down youre referencing the overall.
And.
When we look at it from a same store standpoint, our overall occupancy has actually increased.
I think we referenced 79, 6% so.
Yes.
So from that standpoint, we are seeing growth in occupancy continue overtime and in addition to that we've also implemented rate changes across most of our platform.
And while I think there is a little more sensitivity to rate increases versus what we saw over the last two years, we havent seen significant attrition. It has come from that so we're pretty confident that.
As we continue to do.
Drive those rate levels back to levels that are probably appropriate to cover the cost of the services that we're providing that we can see those occupancy gains.
Maintaining at the pace that they are going now so from that standpoint, I think overall, we're pretty optimistic that we can we can drive our occupancy levels back to where we were and perhaps above the levels that we were at pre pandemic.
And I would just add this to Raj I mean, we've mentioned this in the past but a.
A big part of our efforts around leadership development is not just on the overall operating leadership, but also in our ability to build and grow marketing and sales talent and create a better path in each of our buildings and so that's also leading to a lot of these occupancy gains.
In many ways, we approach things very differently now than we did two or three years ago and so we're seeing the benefit of that as well our investment in marketing our investment in sales and just the overall product as we've invested in each of our buildings to.
Put something in place, where we can be proud of MB a critical part of the communities we serve.
Okay, great. Thank you for that color and then I kind of wanted to focus on M&A as you kind of look towards the future within the next couple of quarters and now that we have the proposed home health rate.
Our valuation is settling out I mean are they still.
Hi, Sal expectation, so high or or what's like the availability of assets now since we have more visibility into the rates.
Standpoint.
Yeah Raj that's a great question.
We are seeing is as exciting and I think that as we're seeing more opportunities come to market in the valuation zone that we feel comfortable pursuing in our disciplined acquisition strategy and so primarily you're seeing home health, but youre also seeing hospice multiples.
And have returned to more normalized rates.
That's really helpful. What we saw the last time, we experienced significant.
Home health reimbursement challenges in the mid 2000 2010 to 2017, we sort of had this opportunity where we were able to acquire assets at favorable valuations that really built the platform. We have now and so we're seeing people and it's taking a little bit for sellers to get comfortable.
All that what they had before isn't worth the same amount as it was but their financials tell that story and so they are becoming more comfortable with that and we see a number of attractive opportunities.
Coming to the table, we will continue to evaluate as we work through the proposed rule and into the final rule, what the actual impact is going to be.
And we're continuing to pursue acquisition opportunities in all three areas, we feel like valuations on the senior living side are coming a little bit better into focus valuations on hospice are becoming more realistic and with home health certainly the impact of the final rule, coupled with last year's impact of last year's final rule.
Is really creating some unique opportunities for us.
Great and then a quick follow up on hospice I think you guys called out that your impact on the final rate would be two 8% increase.
When we think about the originally issued guidance back earlier this year, how does that how does that fare against.
What you had baked into that guidance versus what we have now.
So youre absolutely right, we estimate about a two 8% impact on our revenue per day.
From that home health final rule, and so that will affect our revenue in the in the fourth quarter, we do have baked into the guidance a modest increase.
That increases a little bit higher than that and so we do think it'll be a net positive as we seek to meet and exceed our commitments for this year.
Okay alright, thank you.
Thank you.
Next question please.
And then next question comes from the line of Ben Hendrix with RBC capital markets. Your line is now open.
Thank you very much I appreciate all the comments on the local leadership model and I was just wondering if.
Can you give us an idea of what inning, we're in with your local leadership strategy and is there a margin target that we should think about as you get closer to achieving the optimal leadership profile for each of your clusters.
Yes, so I will I'll, let Matt answer the question on margin, but.
I guess I would put it this way in terms of developing the program.
We've put a lot of time and effort at the beginning of the year.
To really build out this robust robust programs. So just from a program development standpoint.
Were.
You have to an earnings so we're probably halfway through that or maybe a little bit farther we've made some good progress there in terms of like the overall development of the leaders. This is a multi year I mean this is going to go on forever because it's what our focus is we're a leadership company and so from that standpoint, we're seeing really strong returns the talent that's coming into the <unk>.
Organization is incredible but.
We share two examples.
Recognizing sukhoi in Citrus Hills, two incredible leaders, one that was already internal to the organization and develop through the program another that joined us.
A couple of years ago that stepped in and has really changed.
And so the impact of these leaders coming in.
Really is over multiple years and his incredible increase right. So from that standpoint I think.
Right now we want to get to a 100 Ceos, but in the next.
And the next several years once we hit that number we're going to get to 200 and beyond that right and so that's our model for growth for the future.
So from that standpoint, we're still at the beginning stages because we're just we're just now real.
Hitting our stride in bringing those leaders in.
And on a margin front really the target that we're looking at from a margin for home health and hospice.
In the long term is an 18% margin and then on the senior living side getting our margin up to about 15%. So that's why we're looking for those long term targets on margin.
And then we will just emphasize margin is always going to be lumpy in our business and in our strategic model. The way that we approach things, we're buying underperforming assets.
It can pull our margin down and then as those assets.
Kind of fully integrated into our model and we get a CEO in place we see.
That outperformance going forward and so I think those targets are hopefully helpful to the modeling, but we will always expect.
Some lumpiness as we acquire these underperforming assets and then turn them into real resources and solutions in that community.
Some lumpiness as we acquire these underperforming assets and then turn them into real resources and solutions in that community.
And maybe just to add a little bit more color to tie those two things together our investment in leadership and <unk>.
Improvement in margin.
Seeing it now on the senior living side were seeing Thats, a pretty significant ramp in margin improvement and overall bottom line improvement.
Because we invested not only in the local leaders the local eds and future Ceos, but also in each of the markets. There is a team that helps to develop those leaders and two.
Look for acquisition opportunities and so some of that investment. It just takes time for that to pay off and John alluded to this in the script, but we're also seeing that especially.
Julie on the on the home health and hospice side, we strategically made a decision to invest in a number of additional market leaders in building. Those teams. So that we can grow we can invest in new leaders at the local level and we can grow strategically.
From an acquisition and an expansion standpoint, so some of the pressure that we're feeling right. Now is a result of those investments that we made at the beginning of the year and as the year goes on and as time goes on those will just pay up because those investments will become less and lesser percentage of the overall revenue that we bring in.
Thank you for the color.
Thank you.
I'm currently showing no further questions at this time.
To turn the conference back over to Mr. Brent Euro.
<unk> for closing remarks.
Okay, well, thank you Norma and thank you everyone for joining us today and we hope you have a great rest of your day.
Ladies and gentlemen, thank you for your participation in today's conference you May now disconnect everyone have a wonderful day.
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