Q1 2024 Pennant Group Inc Earnings Call

Participants

Kirk Cheney; General Counsel and Corporate Secretary; Pennant Group Inc

Brent Guerisoli; Chief Executive Officer, Director; Pennant Group Inc

John Gochnour; President, Chief Operating Officer; Pennant Group Inc

Lynette Walbom; Chief Financial Officer; Pennant Group Inc

Ben Hendrix; Analyst; RBC Capital Markets

Scott Fidel; Analyst; Stephens

Presentation

Operator

Good day and thank you for standing by, and welcome to the Pennon Group First Quarter 2024 earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the call over to Kurt Cheney, you may begin.

Kirk Cheney

Thank you, Michelle, and welcome, everyone, and thank you for joining us today. Here with me today, I have Brian Gary solely our CEO, John Gardner, our President and COO, and Lynell Walton, our CFO.
Before we begin, I have a few housekeeping matters. We filed our earnings press release and 10 Q yesterday. This announcement is available on the Investor Relations section of our website at w. w. w. dot Pennant Group.com. The replay of this call will also be available on our website until 5 P.M. Mountain Time on May sixth, 2025. Once remind anyone who may be listening to a replay of this call, that all statements are made as of today, May seventh, 2024 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 differ from those expressed or implied on today's call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results except as required by federal securities laws. Pennant 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 Pennant Group is a holding Pennant Group, Inc. as a holding company with no direct operating assets, employees or revenues. Certain of our independent subsidiaries collectively referred to as the service center provide accounting, payroll, human resources, information technology, legal, risk management and other services to the other operating subsidiary subsidiaries to contractual relationships with such subsidiaries words, Pennant company, we are and us refer to the Pennant Group Inc. and its consolidated subsidiaries. All of our operating subsidiaries and the service center are operated by separate independent companies that have their own management employees and assets, references here into the consolidated company and its assets and activities as well as use of the terms. We us our 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 revenues within 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 position not be relied 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 and with that, I will turn the call over to Bryan gear slowly, our CEO. Brent?

Brent Guerisoli

Thanks, Kirk, and welcome, everyone, to our first quarter 2024 earnings call. Before we share results. I want to express deep appreciation to the local leaders and teams who care for our patients and residents each day. You are the foundation of Pennant success, and we are grateful for all you do. We are pleased to report that Q1 was a strong quarter and a great start to the year on a consolidated basis compared to the prior year quarter, our revenue of $156.9 million increased by $30.5 million or 24.1%. Our adjusted EBITDA of $11.2 million increased by $3.3 million or 41.8%, and our earnings per share of $0.2 increased by $0.07 or 53.8%. We remain committed to our five key focus areas, leadership development, clinical excellence, employee experience, margin improvement and growth. Focusing on these untapped fundamentals has created a firm foundation in our core business and significant momentum across the company as our investments in people, systems and growth are bearing fruit. Leadership Development remains a top priority as we've consistently discussed in prior quarters, we are diligently focused on developing a robust pipeline of local leaders, and we continue to progress in our commitment to develop to develop 100 local CEO.s as well as Chief Clinical officers and other C-level leaders. There are now 44 CYO.s and 42 CCO.s driving results throughout the organization. And we expect their ranks to continue to grow throughout the year. As a reminder, to earn the title of CYOR., look, our leaders must not only achieve extraordinary clinical performance culture and growth, but also drive significant financial improvement in their operations. We have found that CEO.s typically generate roughly 1 million more in annual earnings in our executive directors as well as better clinical and cultural outcomes. We are also making meaningful progress on margin year over year. Our consolidated adjusted EBITDA margin improved 90 basis points from 6.4% to 7.3%, reflecting improvement in each segment. We attribute these margin gains to three factors. First, margin is fundamentally connected to leadership as we develop talented and entrepreneurial leaders who exercise discipline and diligence in their operations, they deliver exceptional financial results. Second, our innovative operating model encourages the sharing and adoption of best practices across the organization. And as local leaders implement these best practices, they consistently improve performance.
Third, we continue to invest in best-in-class technology tools and systems that our local leaders leveraged to enhance their clinical and operational results. Turning to growth, Q1 represented a culmination of the significant efforts we have made on both the organic and acquisitional side, leading to a record quarter. This was highlighted by double digit year-over-year percentage increases in same-store total home health admissions and hospice average daily census. This same store growth exemplifies the meaningful potential that exists at our established operations as they mature and expand, coupled with successful integration of several recent transitions.
Our home health and hospice segment revenue increased 27.9% over the prior year quarter, evenly split between organic and acquisitional growth.
On the senior living side, we have steadily increased our revenue per occupied unit as local teams effectively manage resident mix and adjust their prices to reflect the true cost of services they provide, along with occupancy improvements and the successful transition of two new buildings in the quarter, our Senior Living segment revenue increased 14.2% over the prior year quarter. The momentum we've seen in Q1 demonstrates the power of our model to access the latent opportunity that exists in our current operations, while also transitioning new operations into the platform. Operational excellence is a key part of the Pennant story and something upon which we pride ourselves. We want our investors to understand that when they become Pennant owners, they're partnering with the best in class operator as we harness our unique operating model to execute and grow since our spin-off and through the challenges of a global pandemic, we have matured as an organization and added leaders across the company and our management team throughout the field and at the service center. As a result, we have produced nine consecutive quarters of strong performance with earnings each quarter that exceeded the prior year period, and we've experienced triple-digit percentage growth in adjusted EBITDA and EPS. We have repeatedly and consistently done what we said. We were going to do. And while we are encouraged by the progress that we've made, we're even more excited about the foundation that we've built in the future that lies ahead with that I'll turn the call over to John to provide more details on our first quarter operational results.

John Gochnour

Thank you, Brent, and good morning, everyone. We are pleased to report strong performance in both operating segments.
Turning first to our home health and hospice results, including our segment revenue of 116.5 million, it's up $25.4 million or 27.9%. And segment adjusted EBITDA of 17.9 million is up $4.7 million or 35.7% in each of the prior year quarter, roughly 50% of the year-over-year rise in segment revenue was same-store growth, while the other 50% is attributable to the successful transition and improvement of new operations in home health, our total admissions grew 34.3% over the prior year quarter, while Medicare home health admissions increased 28.3% over the prior year quarter.
We also continued our robust hospice growth as admissions increased 25.7% over the prior year quarter and 21.3% sequentially and average hospice daily census increased 21.4% over the prior year quarter and 5.9% sequentially. In addition, we continued to see strong rate growth across both service lines, home health, Medicare revenue per episode increased 3.4% and hospice revenue per day increased 2.2% in each of the prior year quarter. Our ongoing investment in clinical excellence is also contributing to strong relationships with payer partners, which is evident in the 11% growth in our managed care revenue per visit over the prior year quarter. We are encouraged by the upward trends in our reimbursement rates and believe that over the long run payer partners will reward high-quality providers. To that end, we continue to make progress in delivering effective clinical care more efficiently. Our average CMS reported home health star rating of 4.1 stars, an acute care hospitalization rate of 13.4% remain well ahead of national averages, even as we transitioned new operations into the company, many of which are underperforming clinically at the time of acquisition, we graduated our first cohort of future leaders from our new clinical leader training program, which mirrors our CTO and training program to help talented ambitious internal leaders, grow their capacity to become Chief Clinical Officer. Our local leaders also use technology and adopted clinical best practices, helping to lower visits per episode by 5% at 12.81 and our total direct cost per visit by 4.3%, delivering outstanding clinical outcomes efficiently is the foundation for the growth described above and helped improve our segment adjusted EBITDA margin from 14.8% to 15.7%, an improvement of 90 basis points over the prior year quarter.
In summary, we are pleased to report record-breaking census growth, clinical outperformance and margin improvement in our home health and hospice segment. Our senior living business continued its positive ramp as segment revenue increased to $40.4 million, a $5 million or 14.2% increase and segment adjusted EBITDA increased to $3.5 million, a $1.3 million or 55.6% increase each over the prior year quarter. Additionally, same-store occupancy increased 60 basis points to 79.7%, even as our same same-store revenue per occupied unit increased 8.1% to 4,643 each over the prior year quarter. The stability of our senior living business now gives us an additional lever to drive shareholder value, specifically purchasing real estate as an operator of senior living communities with a strong track record of producing excellent clinical and financial results. We are frequently approached by landlords looking to install a new operator under a long-term lease and depending on the terms of the proposed transaction, we often see value in such lease arrangements. In other cases, we have the opportunity of purchase the associated real estate and thus capture the upside it accrues as we improve operating results. While we believe acquiring Senior Living real estate represents a meaningful opportunity to create value in the short and long term, we will apply the same disciplined approach to this asset class as we do to our traditional acquisition asking first, too, then what evaluating the strength of our local operations and weighing the opportunity cost of deploying capital to real estate instead of home health, hospice or senior living operations. To that end, we are pleased to share that in March, we acquired two senior living buildings in Utah, including the real estate connected to the operation, the acquired communities, our Capitol Hill senior living, a 113 unit community in Salt Lake City, Utah and South Gate senior living, a 75 unit community in St. George, Utah, with strong local leadership teams in place, robust cluster support, favorable pricing and locations in areas where Pennant has significant strength in our home health, hospice provider services and home care operation. The deal perfectly illustrates our ability to execute a win-win real estate transaction within our disciplined operations, focused acquisition approach on the home health and hospice side. As we discussed last quarter, we initiated newer home health, a new home health joint venture with John Muir Health on January first. We are excited about this opportunity to work closely with a leading Bay Area health system to deliver world-class home health services venture is off to a strong start as we have effectively implemented Homecare Homebase and other technology solutions put in place and elevated a talented local leadership team and establish meaningful collaboration with the exceptional clinical and operational leaders at John Muir Health. We look forward to providing additional updates on the joint ventures performance throughout the year. After quarter end, on April 12th, we acquired one home health license and certificate of need in King County, Washington and on May first, we acquired South DAVIS, home health and hospice located in Bountiful, Utah. We also acquired through a long-term lease arrangement, the operations of Veranda senior living at Paramount, a 73 unit assisted living and memory care community in the Boise area. These acquisitions expand our continuum of care and provide new opportunities for local leaders in markets where we have existing strength and key referral partnerships.
With that, I'll hand it over 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 March 31st, 31st, 2024, are contained in our 10 Q and press release filed yesterday for the quarter ended March 31st, 2024 we reported total GAAP revenue of $156.9 million, an increase of 30.4 million or 24.1% over the prior year.
Quarter.
We also reported GAAP diluted earnings per share of $0.16, a 166.7% increase over the prior year quarter and non-GAAP diluted earnings per share of $0.2, a 53.8% increase over the prior year quarter. Key metrics for the three months ended March 31st, 2024 include 83.3 million outstanding on our 150 million revolving line of credit and 2.7 million in cash on hand at quarter end. Our leverage ratio of 1.84 times net debt to adjusted EBITDA and cash flows provided from operations of 0.5 million for the quarter. Softer Q1 cash flows were primarily driven by timing of our collection of accounts receivable as we transitioned new operations, including multiple acquisitions executed at the end of 2023, along with the New York joint venture as well as a payment delay from a now resolved issue with a state payer under a senior living reimbursement program. Consistent with our prior statements, we expect cash flow from operations to ramp throughout 2024 and total 30 to 35 million on the year, reflecting organic revenue growth, strong cash collections and bottom line improvements. And with that, I'll hand it back to Brent to highlight a few of our local leaders.

Brent Guerisoli

Thanks, limit. It's my pleasure to spotlight several leaders in our organization who have achieved exceptional results. It Barbara station, Senior Living, Executive Director director, Jacob Velasquez, Clinical Director, Rey Holland and Chief Marketing Officer. Gary Connell have created an exceptional community in Boise, Idaho where residents are treated with love and respect. Employees are engaged and happy in the communities. Results reflect the success since Pennant acquired Barber station in July 2022. This stellar team of local leaders has improved every aspect of the community. As a result, occupancy has increased 135% and EBITDA improved 159%. In addition, our base stations employee engagement scores improved 21% in the same period. The Barber station story demonstrates the exciting potential that exists when we acquire underperforming senior living operations, bring in talented local leaders and implement our unique operating model, Precept, their home health and hospice based in Milwaukee, Wisconsin, led by newly awarded CEO. rich first, along with executive directors, Christina wild And Heather, Ravi, and clinical leaders, Angela Becker and Michelle K Zinski. He's become the employer and provider of choice across Eastern with Wisconsin receptors, strong leadership team and its commitment to operational fundamentals, leadership development and clinical excellence has set a new standard of excellence in the Milwaukee area. Through the quality of its care. Preceptor has earned a five star rating and a hospitalization rate, 12.7% well below the state and national averages. The agency strong culture has produced one of the lowest turnover rates in the company. That receptor has developed meaningful community relationships, revenue has increased 14.8% and EBITDA has increased 58.8% each over the prior year quarter receptor is a key component of our Wisconsin care continuum, where we also operate 21 senior living facilities. These are both examples of the dramatic improvement we see when sea level caliber local leaders stepped into operations. With that, we'll open it up for questions. Sheldon, can you please instruct the audience on the Q&A procedure?

Question and Answer Session

Operator

(Operator Instructions) Ben Hendrix, RBC Capital Markets.

Ben Hendrix

Great.
Thank you very much. Congratulations on the quarter. A question on Dodge follow up on your clinical leadership and your CEO. programs. Just wanted to kind of see what that pipeline, the timing of the graduating classes are and given the Yum, given the fragmented nature of these markets, is that the biggest gating item to developments and how can we see that kind of progressing in the two segments?

Brent Guerisoli

Yes, great.
Great question then is for the most part, these are ongoing programs that are going throughout the year. The cohorts related to the clinical program.
It's more on a quarterly cycle and we've the CEO development programs a little bit quicker on the cycle.
And in a lot of ways, it really is just based on the individuals that we bring into the organization.
So as we continue to grow, that's why we've talked about leadership is our primary focus, and we are going to grow as we bring in great talented leaders.
The other thing that's really important to emphasize here, and we've talked about it for a long time.
We are a clinical business and the most important thing we can do in addition to bringing an incredible operating leader is to partner them with high caliber clinical leaders that understand how to build the business and also develop other clinical leaders. And so what's exciting to see is, as we've as we're developing our clinical leaders in a more effective way, we're seeing improved clinical results.
And I think those financial results just continue to follow.

Ben Hendrix

Great, thank you.
And then follow-up on your real estate strategy. Can you remind us what percentage of real estate you operate that is owned by standard bearer? And are there any and purchase options on the real estate that that kind of stayed with standard bear when you spun off means on?

Brent Guerisoli

Thanks.
Yes, so our real estate strategy really revolves around a couple of things, Ben, and you highlighted a couple of our key partnerships. A large majority of our real estate is owned by standard bear and came with us during the spin. We don't have purchase options on those properties. We have we continue to enjoy a really great relationship with Ensign as our landlord as well as our partner in the enzyme Pennant Care Continuum. And so that continues to be an avenue where they see Senior Living opportunities and we have opportunities to partner with them I think what's exciting about what's happening now is that we're in a period where we can look at a potential transaction, we can determine what's the best way to finance that is it to use our own capital, is it to partner with standard. There is it to partner with another community partner who we've worked closely to develop a relationship with and then I kind of attack that in the way that makes the most sense for our balance sheet and for our operational progress. And so and that's what you saw this quarter and then in the after acquired key here is we did have two real estate transactions using our balance sheet, and then we acquired a long-term lease with the landlord that we already had a favorable relationship with. And so excited about standard there and the progress that they're making a relationship we have continue to have with enzyme and with standard there also we're excited to be kind of tapping this new opportunity for value creation using our balance sheet for real estate acquisitions.

Ben Hendrix

Thank you very much and thank you.

Operator

Scott Fidel, Stephens.

Scott Fidel

Okay, thanks, and hi, everyone. On First question, just wanted to get your feedback on how the 1Q results came in relative to your expectations on our results definitely came in above our forecast and consensus on at the same time you maintain guidance. So just curious on sort of how the 1Q results came in versus first plan and then sort of what your triggers would be, you know, to we'll look to potentially raise guidance at Bob, these trends on continue.

Brent Guerisoli

Yes.
Thanks for the question.
I think we're very encouraged by what we've seen in Q1. This was certainly a very strong quarter for us, and it really puts us on pace at the top end of our guidance at this point. And what I would say as well is we anticipate that the momentum that we've seen in Q1 will continue throughout the end of the year and we're confident in that. But we also at the same time, we don't want to get too far ahead of ourselves. So we're taking a maybe a conservative approach there. But if we do continue to see the progress that we saw in Q1, then we would anticipate making adjustments that guidance throughout later on in the year.

Scott Fidel

Okay, understood. And certainly fair to remain prudent, but helpful to sort of get the visibility on sort of where you think about the outlook within the range being towards the higher end at this point, I'm after the first quarter.
On the second question, just wanted to get sort of some visibility into your thinking on sort of SL. trends from here over the balance of the year, you know, I know that you sort of were able to achieve continued solid rate growth and then had some increase in occupancy or how would you see occupancy trending over the course of the year from here. And then remind us on your on your rate renewals on sort of the tempo of that.
In terms of Bob, you know, the percentage of your rooms that were renewed as of the beginning of the year as compared to over the course of the year?

Brent Guerisoli

Yes, there is certainly some seasonality that we felt in our occupancy numbers in Q1, and that's been pretty consistent at the end of the year, the beginning of the end of with the holidays and the and the beginning of the new year, there tends to be a little bit of a downturn in our occupancy, so we saw more or less flat performance there. What's encouraging, though, and what we've generally seen is increased occupancy that steps up throughout the rest of the year. And so we've kind of that's what we see and we're expecting to see throughout the end of the year in that regard.
And Scott, remind me what was your second question?

Scott Fidel

Yes, Brad, just on sort of the tempo of the rate renewals on the SSL side, over the course of the year?

Brent Guerisoli

Yes.
So we don't necessarily have rate renewals that go into effect across the board all at the same time. That being said, we anticipate increasing rates across the board at different times in each of the locations. And and this is part of the function of the local leadership teams as they look at the market, the communities and the pressures and whatnot. They're making appropriate adjustments throughout the year.
The other thing that's really important to remember, there's sort of two elements to this. One is the room and board rate increases and then the second is on what we call our carriage charges or the actual tiers that we're providing. And so what we're doing there is really focusing on making sure that we're charging for the services that we're providing and ensuring that we're putting the residents at the level, the appropriate clinical levels and then working with them really on a monthly or at least on a quarterly basis to address those needs and appropriately adjust the rates. So we were encouraged by strong rate growth as we talked about, and we would anticipate that growth to continue throughout the year.

Scott Fidel

Okay. And then just I had one more question on if you were able to provide us with an update on how your wage inflation trends are progressed in the first quarter on across the three business lines. I think that you did show some traction sequentially and sort of lowering the rate of increase across each of the three business lines, but would be helpful if you're able to share some up some figures with us.

John Gochnour

Yes, Scott, we continue to see some significant wage pressure.
And I think you're seeing that it's translate into about a 5% increase in both service lines and in an overall wage inflation pressure. I think in the first quarter, we actually saw a little bit of a tick back and the wrong direction, which was was disappointing, right? We continue to hope that we'll see more and more normalization and back to wage inflation that sort of corresponds with the changes in reimbursement that we're receiving.
That's not the case yet.
I think what we're seeing is there are some positive trends, and I think those are manifesting themselves as we're able to and we've seen improvement in our turnover. We've seen improvement in our employee engagement scores. And what that's driving is the ability to manage more effectively and so you're seeing improvement on the margin side in part because we're able to manage that labor even in spite of inflation and the cost pressure that we're experiencing in a more effective manner. And so that's that's kind of what I would say is just it's still 5% in both segments on a year-over-year basis. I think it ticked up from 0.9% in Q4 to 1.2% and not this year, but we're still looking at that 5% year over year, which is still significant.
And outside of our long-term expectations.

Scott Fidel

Okay, understood.

John Gochnour

And then just within the HH. and agents that pretty consistent across home health and hospice in terms of those, are those 5% trends yes, we continue to look at that segment combined because so many of our operations operate as of both the home health and hospice provider. So while we bifurcate the data in some cases on the labor inflation side.
It makes sense to keep it combined.

Scott Fidel

Okay, got it. Thank you.

Operator

Thank you. I'm showing no further questions. I'd like to turn the call back over to Brinker selling for closing remarks.

Brent Guerisoli

Thank you, Michelle, and thank you, everyone, for joining us today.

Operator

Thank you for your participation. And this does conclude the program and you may now disconnect, and everyone have a great day.