Pennant Group, Inc. Q3 FY2024 earnings call

• Brent noted Q3 consolidated results with revenue of $180.7 million, an increase of $40.5 million or 28.9% over prior year quarter, adjusted EBITDA grew to $15.1 million, an increase of $4.3 million or 39.2% over prior year quarter, and adjusted earnings per share $0.26, an increase of $0.06 or 30% over prior year quarter. - John highlighted Home Health and Hospice segment's strong performance with same-store and new transitions, Home Health revenue growth, Hospice revenue growth, and Senior Living segment's revenue and occupancy growth, including the acquisition of three communities in Northern Wisconsin. - Lynette reviewed financial results, mentioned equity offering, updated full year guidance, and spotlighted leaders in the organization with exceptional results in various locations.

Home Health and Hospice segment: Quarterly revenues of $135.7 million, an increase of $34.2 million or 33.7% over the prior year quarter. Same store revenue growth of $12 million or 12.2%. 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. Home health revenue increased 33.7% as total home health admissions improved 38.5%, Medicare home health admissions increased 30.8% and revenue per episode increased 4.9% each over the prior year quarter. Hospice revenue increased 24.6% as admissions increased 22.8%, same store admissions increased 12.2%, average daily census increased 27.7% and same store average daily census increased 12.8% each over the prior year quarter. 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. This was paired with 7.8% year-over-year gains in revenue per occupied unit. Margin increased from 4.6% in Q3 2022 to 8% in Q3 2023 to 9.8% in Q3 2024, a 20 basis point increase over the last two years.

• Anticipates total adjusted revenue of $665.3 million to $706.5 million, a 28.5% increase over 2023 at the midpoint. - Adjusted EBITDA of $51.9 million to $55.2 million, a 31.5% increase over 2023 at the midpoint. - Adjusted earnings per share of $0.90 to $0.96, a 27.4% increase over 2023 at the midpoint. - Updated guidance incorporates current operations, organic growth, diluted weighted average shares outstanding, and various factors excluding unannounced acquisitions, etc.

• Forward-looking statements are subject to risks and uncertainties that could cause actual results to materially differ from those expressed or implied. - Listeners should not place undue reliance on forward-looking statements and are encouraged to review SEC filings for a more complete discussion of factors that could impact results. - Except as required by Federal securities laws, the company does not undertake to publicly update or revise forward-looking statements.

Q: Just your views of the upcoming administration -- presidential administration, 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?

A: Thanks 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, the things that we anticipate, the experience that we've had in operating over the last 12 years through multiple Democratic as well as the first Trump administration. The first thing that we noticed is there has been an increase -- a pretty significant increase on the regulatory enforcement side over the last 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 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 necessary. The second thing, on the reimbursement front, we have three years now of flat to declining reimbursement on home health. That contrasts with 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. Again, our focus is truly on delivering the best possible care to our patients and controlling the things that we can control. So how we'll respond to the election, we want to make sure that all of our employees are in a good spot. We want to 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.

Q: Just sort of follow up on some of the M&A commentary. And clearly M&A is sort of in full flight right now across the businesses. But certainly it feels like there's a bit of an inflection right now on the Senior Living side where you've done several transactions. Recently, I definitely noted, John's comments around seeing a healthy pipeline on that side. So it feels like perhaps that that side of the business, you're getting more comfortable again with M&A on the Senior Living side. So, was hoping maybe you could sort of frame sort of how you're thinking about your capital allocation towards M&A across Home Health and Hospice and then Senior Living. I know that you just sort of look opportunistically at where the opportunities are, but also as it would be helpful if you wanted to maybe give us some framework around how you're thinking about allocating growth capital towards each of the two major segments?

A: Yeah, great questions there, Scott. And I think you framed it well. And really, when we look at opportunities, there're three determinants that we're considering. The first is we're a first who then what organization do we have leaders ready to go to step into opportunities. And then the second is we grow where we have -- so if we have healthy clusters, healthy markets, we're going to invest in those leaders. In those leaders, they are looking for opportunities to grow. So they find great leaders through our CIT pipeline and then we look to grow in those areas. And then the third is really that we have good opportunities, right, the right way, and we see there's an opportunity to grow and develop and really create value. What you're seeing on the Senior Living front, and you pointed it out, this is really a reflection of the strength that we're experiencing in our Senior Living business. 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. We are going to grow in both segments and we're an opportunistic growth company and so we're going to grow where we have strength and where there're great opportunities. The great thing is our pipeline is robust. We talked about Signature. There're other opportunities in the pipeline as well that we anticipate bringing on board in 2025. And so from that standpoint, we're going to allocate capital where we think we can create the most value. The other thing just to bear in mind, on the Senior Living side, oftentimes it's not really a capital allocation question because it is upfront unless we choose to invest in real estate and we have done a couple of those. We did the two building earlier this year in Utah 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 want to focus our 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.

Q: Definitely was interested in the sequential jump in the home care revenues. I'm assuming that that was from 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 HHH side, whether you are more interested in growing that home care business line as well?

A: Yes, Scott, really appreciate the question and I'll highlight a couple of things. First of all, we're really excited about how home care is trending. Some of this is based on pulling some the way that we're allocating the revenue between Medicaid and PCS so that we create more clarity about how much revenue is in that home care and other bucket to really highlight the progress that we're making on the non-skilled side. The PCS business has done really well. The other thing -- there's two other things that are captured there. One is our provider services business, which is our geriatric primary care and palliative care business where we're building out continuums in markets across the country and we're really excited with the progress that that's made and kind of the exponential growth that we've seen there. And then we're also capturing the Hartford management fee in that line. So that's sort of the things that have been pulled. There's a little bit of sort of reallocation from some of the Medicaid rates that were previously captured up in Home Health and Hospice and are now appropriately captured with Home Care so that we make sure that you can see how that business is trending and then the other two components that I just mentioned, but I'll just highlight the strength of our home care business. We highlighted what Jesse and his team have done in San Diego. That's true kind of across the board. We're really excited about the group of leaders we have there, their passion for using home care as a solution for some of the social determinant of health issues that abound in our society. And so we do see that as an opportunity and a growth area where our model can uniquely impact individuals who are struggling and need that non-skilled support. So I think你'll see us continue [Technical Difficulty] opportunities and look to grow in that side of the business as well.

Q: Obviously you've been operating in this very tight rate environment in home health for several years and, hopefully, we can be optimistic that maybe there's sort of a different rate regime on the way with the new administration. But in the meantime, just at that sort of net neutral rate that you talked about, do you feel like you can maintain your home health margins 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 2025 on the margin side?

A: Yeah. Scott, we remain confident in the unique ability of our operating model that is focused on local leaders standing transparently seen 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, just the capability that that model has to respond to these difficult changes in reimbursement. Anytime you have 5.4% labor -- an increase in our labor costs and you get a flat reimbursement 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 community. We've done a better job this year of retaining that talent and improving our turnover, which is what's driven this growth. And so while it is 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 [Technical Difficulty] 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. 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 on the reimbursement side, our model will allow us to emerge successfully.