Q3 2024 The Pennant Group Inc Earnings Call
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Speaker Change: Good day and thank you for standing by. Welcome to the Pennant Group Third Quarter 2024 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 will then hear an automated message advising your hand is raised. To withdraw your question, please press star-one-one again.
Please be advised that today's conference is being recorded.
Speaker Change: I would now like to hand the conference over to your first speaker today, Kirk Cheney. Please go ahead.
John Gochnour, John Gochnour,
Kirk Cheney: Thank you, Darian. Welcome everyone and thank you for joining us today. Here with me today I have Frank Guerisoli, our CEO, John Gochnour, our President and COO, and Lynette Walbom, our CFO. Before we begin, I have a few housekeeping matters.
A replay of this call will also be available on our website until 5 p.m. Mountain Time on November 6, 2025. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, November 7, 2024, and these statements will not be updated after today's call.
Kirk Cheney: Also, any forward-looking statements made today are based on management's current expectations and assumptions 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.
Kirk Cheney: Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results.
As required by federal securities laws, we do not undertake to publicly update or revise any forward-looking statements where changes arise from new information, future events, changing circumstances, or for any other reason.
Kirk Cheney: In addition, the planning group, Inc. is a holding company with no direct operating assets, employees, or revenues.
Kirk Cheney: Certain of our independent subsidiaries, collectively referred to as a service center, provide administrative services to the other operating subsidiaries through contractual relationships with such subsidiaries.
Kirk Cheney: The words Pennant, Company, We, Our, and Us refer to the Pennant Group, Inc. and its consolidated subsidiaries.
Kirk Cheney: Our operating subsidiaries and the service center are operated by separate independent companies that have their own management, employees, and assets.
Kirk Cheney: References herein to the consolidated company and its assets and activities, as well as use of the terms we, us, our, and similar terms, do not imply that the Pennant Group, Inc., has direct operating assets, employees, or revenue, or that any of the subsidiaries are operated by the Pennant Group.
Kirk Cheney: Also, we supplement our GAAP reporting with non-GAAP metrics. When we use 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 intent case.
Speaker Change: With that, I'll turn the call over to Brent Guerisoli, our CEO. Brent?
Brent Guerisoli: Thanks, Kirk, and welcome, everyone, to our third quarter 2024 earnings call.
Brent Guerisoli: We are pleased to report another record-breaking quarter with strong results across our business. We are so grateful for the more than 7,000 amazing team members throughout the organization.
Speaker Change: Through their dedicated efforts, our leaders and teams drove new highs in revenue, census,
and our businesses are healthy and growing.
Speaker Change: Collectively, our Q3 consolidated results reflect revenue of $180.7 million, an increase of $40.5 million or 28.9% over the prior year quarter.
Speaker Change: Adjusted EBITDA also grew significantly to $15.9 million, an increase of $4.3 million or 39.2% over the prior year quarter. Adjusted earnings per share for the quarter
Speaker Change: $0.26, an increase of $0.06 or 30% over the prior year quarter.
Speaker Change: These results reflect our ongoing commitment to the five key focus areas we have highlighted throughout the year. Leadership development, clinical excellence, employee experience, margin improvement, and growth.
Speaker Change: We are a leadership company, and developing local leaders remains at the heart of our operating model. As the talents and experience in our operations and clusters deepens,
Speaker Change: With strong portfolio companies and our efforts throughout our footprint, we are able to more quickly improve new acquisitions and grow seasoned operations.
and development programs is the catalyst for enduring momentum.
Speaker Change: This investment continues, as year to date we have added over 60 CEOs in training and elevated nearly 40 internal clinical leaders in our newly expanded Clinical Leadership Development Program.
Speaker Change: Shortly after quarter ends, we added more fuel to our growth engine in the form of a follow-on equity offering.
Speaker Change: The purpose of this offering, which follows the expansion of our Revolving Credit Facility in August,
Speaker Change: is to prudently manage our balance sheet and give us additional capital to grow. It was our pleasure, during the marketing process, to introduce new investors to the Pennant story and help them catch the vision of the significant opportunities that exist in our platform and potential for future growth.
now with Zero Debt and Abundant Dry Powder.
Speaker Change: We are well positioned to execute on the second portion of the signature purchase and the robust acquisition opportunities in our pipeline.
Speaker Change: Based on this sustained momentum in our business, we are again raising annual guidance.
We'll adjust the revenue.
of $665.3 million to $706.5 million.
A 28.5% increase over 2023 at the midpoint.
Speaker Change: Adjusted EBITDA of $51.9 million to $55.2 million, a 31.5% increase over 2023 at the midpoint, and adjusted earnings per share of $0.90 to $0.96.
A 27.4% increase over 2023 at the midpoint.
Speaker Change: With that, I'll turn the call over to John to provide more detail on our third-quarter operational results.
John Gochnour: Thank you, Brent, and good morning, everyone. Our strong Q3 performance, both in same-store operations and new transitions, demonstrates the ability of our local leaders and teams.
John Gochnour: to thrive through periods of intense growth. Of note, we do not utilize a centralized acquisition team and instead rely on our local leaders with the support of service center partners to transition new acquisitions.
John Gochnour: As our results show, they do it exceptionally well, while continuing to accelerate performance in their local operations.
John Gochnour: Our home health and hospice segment rolls on with increasing strength, generating quarterly revenues of $135.7 million.
John Gochnour: increase of $34.2 million or 33.7% over the prior year quarter. This included same-store revenue growth of $12 million or 12.2%.
John Gochnour: Segment-adjusted EBITDA of $21.9 million increased by $6 million, or 37.5% over the prior year quarter. Segment-adjusted EBITDA margin increased to 16.1%, a 20 basis point improvement over the prior quarter.
for Home Health.
John Gochnour: continued to accelerate. Home health revenue increased 33.7 percent as total home health admissions improved 38.5 percent. Medicare home health admissions increased 30.8 percent and revenue per episode increased 4.9 percent.
John Gochnour: each over the quarter. We are also pleased to note that same-store home health admissions grew by 15.5 percent and same-store Medicare home health admissions increased by 8.6 percent each over the prior year quarter.
The driving force behind this growth remains exemplary clinical outcomes.
John Gochnour: In Q3, our percentage of home health agencies with a star rating of 4 and above increased to 73.5%, and our acute care hospitalization rate of 13.3% remained well below the national average of 14.1%.
John Gochnour: In addition, we continue to trend ahead of the curve in home health value-based purchasing, where, at present, over 80% of the operations we owned during the 2020 unemployment period project to receive positive adjustments to our 2025 revenues.
John Gochnour: These strong clinical outcomes make us a provider of choice in our communities, attract additional talented clinicians to our teams, and ultimately lead to strong financial outcomes.
We also continue to drive improvement in our hospice programs.
John Gochnour: As our existing operations set themselves apart in the community, we successfully transitioned recent acquisitions. Hospice revenue increased 24.6%, as admissions increased 22.8%, same-store admissions increased 12.2%.
John Gochnour: average daily census increased 27.7% and same-store average daily census increased 12.8%.
John Gochnour: During the period, length of stay remains steady. Each of these items is over the prior year quarter.
John Gochnour: We continue to see significant opportunities for hospice growth as we grow and develop talented business development teams in our local operations, improve length of stay through community education, and build out continuums of care in new communities.
John Gochnour: On the regulatory front, based on the 2025 Final Hospice Rule, which became effective on October 1st, we model a 2.9% rate increase to our pennant operations.
This modest increase will provide an appropriate update to reimbursement.
John Gochnour: offset the persistent impact of inflation and as many of these costs have already been realized should provide an additional tailwind through the remainder of the year.
Last week, CMS issued the 2025 Home Health Final Rule.
John Gochnour: provides a negative 1.8 percent permanent behavioral adjustment and a 0.4 percent decrease to reflect the updated fixed dollar loss impact on outlier payments.
John Gochnour: These negatives are offset by a market basket update of 2.7% to yield a proposed aggregate net increase of 0.5% in Medicare fee-for-services payments in 2025.
John Gochnour: As Applied Dependent, based on our geographic distribution and the finalized Wage Index updates, we anticipate a net neutral impact on reimbursement per episode under the 2025 Final Rule.
John Gochnour: The final rules reimbursement reduction is half as large as the cut that CMS originally proposed.
John Gochnour: Well, we appreciate that CMS responded to feedback from us and other stakeholders regarding the unsupportable and ill-advised cuts originally proposed.
John Gochnour: We are hopeful that CMS will soon revisit its policy of scarcity relating to home health and recognize that properly reimbursing high quality home health providers is necessary for patients and good for the public fisc.
as we've stated previously.
Speaker Change: Tennent began in and has thrived through periods of difficulty much like today.
John Gochnour: We know our local leaders will respond nimbly and appropriately to these changes, as they have in the past. The cyclical nature of home health care reimbursement, coupled with our strong clinical outcomes, gives us confidence that the value of these changes will continue to grow.
will be penalized moving forward.
Our senior living business continues to perform well.
John Gochnour: Senior Living Segment Revenue of $45 million is up 16.3% over the prior year quarter. Adjusted EBITDA of $4.4 million has increased 43.8% over the prior year. Same-Store Occupancy continues to grow, reaching 80.2% in the quarter, a 100 basis point increase sequentially.
John Gochnour: This was paired with 7.8% year-over-year gains in revenue per occupant unit.
John Gochnour: As we have invested in leaders, increased occupancy, improved revenue quality, and enhanced operational performance, we have seen a consistent increase in margin, from 4.6% in Q3 2022, to 8% in Q3 2023, to 9.8% in Q3 2024.
John Gochnour: basis point increase over the last two years. There remains an upside in this segment and we're excited to continue to invest in its future.
John Gochnour: As we announced on November 1st, after quarter end, we closed on the acquisition of three communities in northern Wisconsin through an attractive long-term triple net lease arrangement.
transaction added 125 units to our portfolio in the state.
John Gochnour: where we have CEOs in training prepared to operate and strong clusters and leaders ready to assist with the transition. We continue to evaluate a robust pipeline of opportunities to purchase well-priced senior living real estate or step into favorable triple net leases as landlords eagerly seek to attract and partner with higher
John Gochnour: We will remain disciplined as we evaluate these opportunities and continue to improve the operational fundamentals of our senior living business.
John Gochnour: On the home health and hospice side, in August, we acquired the Washington and Idaho assets of Signature Healthcare at Home. The integration and transition of these operations is proceeding well, and we are beginning to unlock additional value in these businesses.
John Gochnour: as we implement our unique operating model, share best practices, and provide world-class support from our service center.
John Gochnour: As you may recall, Signatures Oregon Assets represent the second and larger portion of the transaction, and we continue to prepare to close the acquisition on January 1st, 2025.
John Gochnour: We are excited to welcome Signatures Oregon Operations to the pennant team and look forward to the bright future that we will have as one of the largest independent providers in the Pacific Northwest.
John Gochnour: Even as we remain laser focused on integrating the significant number of operations we have acquired over the past 18 months.
John Gochnour: Along with the second tranche of Signature, we continue to see a robust stream of meaningful acquisition opportunities.
in both segments.
John Gochnour: As we have said before, our growth is not the result of arbitrary quotas for capital deployment. We ensure that we have the right operational and clinical leadership to make an impact on a new community or market and prioritize investments that make sense for the long-term health of our organization.
Speaker Change: With that, I'll hand it to Lynette for a review of the financials. Lynette?
Lynette Walbom: Thank you, John, and good morning everyone. Detailed financial results for the three months ended September 30, 2024 are contained in our 10-Q and press release filed yesterday.
and a just-said diluted earnings per share of $0.26.
Speaker Change: Key metrics for the three months ended September 30, 2024 include $113 million drawn on our revolving line of credit and $4.5 million cash on hand at quarter end.
2.05 times net debt to adjusted EBITDA.
and cash flows provided from operations of $18.7 million year-to-date.
including $7.7 million in Q3.
Speaker Change: As Brent described above, after quarter-end, we issued approximately 4 million shares of common stock, which generated $115.5 million in net proceeds for the company. We have used the proceeds to pay down our revolver, which is fully available to be deployed. We now have abundant drive-thru sales.
Speaker Change: and future growth, including the $48 million acquisition of Signatures Organ Operations set to close in January 2025.
Speaker Change: Our year-to-date results and the impact of the equity offering on our outstanding debt and related interest expense merit an increase in our full-year guidance. Accordingly, we are revising and raising our full-year guidance as follows.
Speaker Change: Full year 2024 total revenue between $665.3 million and $706.5 million. Adjusted earnings per diluted share between $0.90 and $0.96. And adjusted EBITDA between $51.9 million and $55.2 million.
Speaker Change: This updated guidance incorporates current operations and organic growth, diluted weighted average shares outstanding of approximately 32.5 million, and a 26% effective tax rate.
Speaker Change: It anticipates continued strong operation operating performance through the end of the year hospice reimbursement hospice reimbursement rate adjustments
Speaker Change: It excludes unannounced acquisitions, the announced purchase of signature assets, startups, share-based compensation, acquisition-related costs, or one-time implementation and unusual items.
Speaker Change: I would now like to spotlight a few leaders in our organization who have achieved exceptional results. Their stories demonstrate the remarkable progress that can occur when local leaders build strong culture and develop high-performing teams of sea-level leaders in our operations.
Speaker Change: Bluebird Home Health and Hospice, City of Idaho, joined the Pennant Group through acquisition
2023...
Speaker Change: led by future CEO Justin Stenquist, future CCO Paige Ziemer, future CMO Allie Luzzetti, and director of operations Sarah Hamilton, Bluebird has focused intensely on culture and being a solution.
healthcare community partners. As a result, Bluebird has grown cost-effective.
agencies in the same community.
Speaker Change: At Safe Harbor Home Care in San Diego, California, CEO Jesse Madera and Operational Leaders Madera and Leslie Minchello.
Speaker Change: shine a light on the compelling opportunity that exists in private duty home care and veteran support services.
Speaker Change: By focusing on the quality of care and the social determinants of health, they have filled a vital need in the local care continuum and shown that our operating model creates significant value in non-skilled care just as it can in skilled care.
Speaker Change: Safe Harbor's revenue and EBITDA have grown 83% and 285% respectively, each over the prior year quarter. We look forward to the continued success that Jesse and his team will create in Southern California.
at Harborview Assisted Living and Meadowview Assisted Living.
Speaker Change: CEO Tammy Wagner, CWO Eseli Gedzinski, and Wellness Director Stephanie Kopis continue to contribute to our healthy performance in northern Wisconsin.
Speaker Change: This team has created an exceptional culture, which is evident in employee engagement results and turnover rates that are roughly 50% better than industry average.
Speaker Change: Healthy culture has driven occupancy up 900 basis points over a quarter over to over 96 percent.
Speaker Change: Strong financial results have followed, including revenue growth of 11% and EBITDA growth of 135% each over the prior year quarter. With that, I'll turn the call back over to Brent for concluding comments.
Thanks, Lynette. We conclude.
Brent Guerisoli: I'd like to once again thank all the operators and clinicians who, like those highlighted above, dedicate themselves daily to providing life-changing services to our patients and residents.
Brent Guerisoli: You are truly making a difference in the lives and communities we serve and it is an honor to work alongside you.
With that, we'll open it up for questions.
Speaker Change: Darian, can you please instruct the audience on the Q&A procedure? Absolutely. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster.
[inaudible]
Speaker Change: Our first question comes from the line of Ben Hendricks of RBC Capital Markets. Your line is now open.
Speaker Change: backdrop, the regulatory backdrop for both segments under President Trump's first administration or first term and how it contrasts under the current administration and what you're expecting going forward overall in terms of for an operating backdrop. Thank you.
Yep
Speaker Change: for the question. And the first thing I'd say is that obviously we're agnostic about politics as far as the way that we operate the business. Our focus is on controlling the things that we can control. Happy to share a few of the things that we anticipate.
Speaker Change: that was relatively different than what we saw during the Trump administration previously. And so we're optimistic that as CMS continues to consider what's the best way to approach
Speaker Change: you know, reducing fraud in the industry and all of the things that they're responsible for, that they'll recognize that burdening good quality providers with significant.
post payment audits and things like that isn't isn't necessary.
The second thing on the reimbursement front...
three years now of
flat to declining reimbursement on home health.
that contrast with the
Speaker Change: under the Trump administration where we saw more solid reimbursement patterns, where we saw increases that actually corresponded with the inflation that we felt. So I think those are the two biggest things that we'd highlight.
Speaker Change: Again, our focus is truly on delivering the best possible care to our patients.
Speaker Change: and controlling the things that we can control. So how we'll respond to the election, we wanna make sure that all of our employees are in a good spot. We wanna make sure that we are able to continue to grow at the pace that we've been growing, that we continue to have acquisition opportunities to take the quality of care that we have to new communities and that we continue to control the things we can control.
. . . . .
Great. Thanks, guys.
Thank you.
Our next question comes from the line of Scott Feidel.
Your line is now open.
Hello, it's...
Who was, is that Prashant right now?
Scott Fido? Yes, please.
Speaker Change: Okay, great. Yeah, you were a little jumbled on the call there. Great. Hi, everyone.
Speaker Change: I wanted to just sort of follow up on some of the M&A commentary.
Speaker Change: And clearly, you know, M&A is sort of in full play right now across the businesses.
Speaker Change: But certainly, it feels like there's a bit of an inflection right now on the senior living side where, you know, you've done several transactions recently. I definitely noted, you know, John's comments around seeing a healthy pipeline on that side. So it feels like, perhaps.
Speaker Change: That side of the business, you're getting more comfortable, again, with M&A on the senior living side. So, you know, was hoping maybe you could sort of frame sort of how you're thinking about capital allocation.
Speaker Change: towards, you know, M&A across home health and hospice and then senior living. I know that you, you know, just sort of look opportunistically at where the, you know, the opportunities are, but also as it would be helpful if you wanted to maybe give us some framework, you know, around how you're thinking about allocating growth capital towards each of the two major segments.
Speaker Change: Yeah, great, great question, questions there, Scott, and I think you framed it well and
Speaker Change: And really when we look at opportunities, there's three determinants that we're considering. The first is, if we're a first two, then what organization? Do we have leaders ready to go to step into opportunities? And then the second is we grow where we have.
Speaker Change: So if we have healthy clusters, healthy markets, we're going to invest in those leaders there are looking for opportunities to grow. So they find great leaders through our CIT pipeline.
Speaker Change: look to grow in those areas, and then the third is really that we have, you know, good opportunities, right?
Speaker Change: The right way and we see there's an opportunity to grow and develop and really create value. What you're seeing it on the senior living front and you pointed it out. This is really a reflection of the strength that we're experiencing in our living business.
Speaker Change: And so Wisconsin has been one of those markets in particular that we just announced this acquisition. We've done other acquisitions more recently in Wisconsin. We're growing in a healthy way. We've got strong teams in place, and so we've got significant opportunity to grow there.
Speaker Change: We are going to grow in both segments and, you know, I...
Speaker Change: We're an opportunistic growth company, and so we're going to grow where we have strength and where there's great opportunities. The great thing is our pipeline is robust. We've talked about signature. There's other opportunities in the pipeline as well that we anticipate bringing on board in 2025. And so from that standpoint,
Speaker Change: We're going to allocate capital where we think we can create the most value.
up front.
Speaker Change: unless we choose to invest in real estate. And we have done a couple of those. We did the two buildings earlier this year in Utah.
Speaker Change: and those have been really, really strong for us. And we'll look for opportunities on the real estate side where it makes sense, but we're kind of slowly moving into that because for the most part, we wanna focus our...
Speaker Change: allocating dollars to investing into opportunities where we can create value. So that's kind of the way that we're going to approach it. We're excited about both of our business lines and anticipate continuing to see strong growth across the board.
Okay, great. Got it. And then, next question.
Speaker Change: definitely was interested in the sequential jump in the home care revenues. I'm assuming that that was from...
Speaker Change: probably the first tranche of Signature. So maybe there was a bit of a different business mix there. Maybe, can you sort of confirm that and then sort of talk about the profile of that business and then also whether as you're looking at additional M&A opportunities in the Triple H side, whether you are more interested in growing that home care business line as well.
Speaker Change: that we've seen there, and then we're also capturing the Hartford management fee in that line.
Speaker Change: can uniquely impact individuals who are struggling and need that non-skilled support. So I think you'll see us continue to evaluate opportunities and look to grow in that side of the business as well.
Collar: Okay, that's helpful, Collar. It's good to know that the Hartford is in there, too, because just in the third quarter alone, it sort of moved towards like a 50 million annualized revenue business first.
Speaker Change: you can go to our Annual Report platform, which is our website, also have more information on how to convert effectively to different formats and split file, and we will put a link to that pipeline in the chat.
Obviously, you've been operating, you know, in this very tight...
Speaker Change: rate environment in home health for several years. And hopefully, you know, we can be optimistic that maybe there's, you know, sort of a different rate regime, you know, on the way with the new administration. But in the meantime, you know, just, you know, at that sort of net neutral rate that you talked about, do you feel like you can, you know, maintain your home health margins, you know, with the other levers that you have, even grow them? Or do you think there will be a little bit of diminution for the Medicare home health fee-for-service business in 25 in the margin type?
Yeah, Scott, we remain.
Have a good day.
Speaker Change: in the unique ability of our operating model that is focused on local leaders standing transparently seeing the impact of everything from a revenue change to a change in the way that they're operating their business and the cost impact of that decision.
Speaker Change: just the capability that that model has to respond to these difficult changes in reimbursement. Anytime you have, you know, 5.4 percent labor
Speaker Change: an increase in our labor costs and you get a flat reimbursement.
Speaker Change: update, it's difficult to maintain margin. And I think our home health operators have done an extraordinary job of seeking to operate more efficiently, continuing to encourage our clinical teams to operate at the top of their licensure, to be as productive as possible so that we can be the best.
Speaker Change: We've done a better job this year of retaining that talent
what's what's driven this growth and so while it is
Speaker Change: It's a huge headwind to not receive an update in the inflation environment that we are operating in. I think what you've seen over the last three years continues to be our focus. Control the things that we can control. Can we build better relationships with institutional referral sources?
Can we do a better job?
Speaker Change: making sure that we're driving the best clinical outcomes so that our payers will recognize that and give us better rates on the managed Medicare side and the managed care side. There's different tools that we use to offset that Medicare rate.
Speaker Change: What we view as really a cut, I mean, it's essentially flat to just very, very modestly down. But I do think you'll continue to see progress on the margin side. What we're built for. And I think we've shown that over the last 12 years, that even in periods of uncertainty and difficulty.
Speaker Change: the immersion site, our model will allow us to emerge successfully.
Okay, thanks. Helpful caller. Thanks.
Speaker Change: Please press star 11 if you do have a question. Give us one second to compile the Q&A roster.
John Fidel, John Fidel, John Fidel,
Once again, that's star 11 for any additional questions.
Thank you.
Speaker Change: And I'm showing no further questions, so this will conclude the question and answer session. I would now like to turn it back to Brent Guerisoli, CEO, for closing remarks.