Pennant Group, Inc. (NASDAQ:PNTG) Q4 2023 Earnings Conference Call February 29, 2024 12:00 PM ET
Company Participants
Kirk Cheney – General Counsel & Corporate Secretary
Brent Guerisoli – CEO & Director
John Gochnour – President & COO
Lynette Walbom – CFO
Conference Call Participants
Dean Sublett – Stephens, Inc.
Operator
Good day, and thank you for standing by. Welcome to the Pennant Group Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today, Kirk Cheney. Please go ahead.
Kirk Cheney
Thank you, Daniel. Welcome, everyone, and thank you for joining us today. Here with me today, I have Brent Guerisoli, our CEO; John Gochnour, our President and COO; and Lynnette Walbom, our CFO. Before we begin, I have a few housekeeping matters. We filed our earnings press release and 10-K yesterday. This announcement is available on the Investor Relations section of our website at www.pennantgroup.com. A replay of this call will also be available on our website until 5:00 p.m. Mountain on February 29, 2025.
All statements made on this call are as of today, February 29, 2024, and will not be updated after the call. 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.
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 from new information, future events, changing circumstances or for any other reason.
In addition, the Pennant Group, Inc. is 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 subsidiaries through contractual relationships with such subsidiaries.
The words Pennant, company, we, our 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 herein to the consolidated company and its assets and activities as well as the use of the terms we, us, are in similar terms do not imply that 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 upon to the exclusion of GAAP reports. Our GAAP to non-GAAP reconciliation is available in yesterday’s press release and is available on our 10-K.
And with that, I’ll turn it over to Brent Guerisoli, our CEO. Brent?
Brent Guerisoli
Thanks, Kirk, and welcome, everyone, to our fourth quarter and full year 2023 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 across our platform every day. Your compassion and dedication are the bedrock of Pennant’s clinical and financial success. We are grateful to work alongside you and partner with you in providing life-changing service. We are pleased to announce strong fourth quarter results to cap off a year of consistent progress and steady growth.
In Q4, we generated adjusted earnings per share of $0.22, bringing full year 2023 adjusted earnings per share to $0.73. This exceeds our earnings guidance midpoint of $0.72, which we raised in our last earnings call. Collectively, our full year consolidated results reflect revenue of $544.9 million an increase of $71.7 million or 15.1% over the prior year and adjusted EBITDA of $40.7 million, an improvement of $9.2 million or 29.1% over the prior year.
During 2023, our consolidated EBITDA margin increased 80 basis points to 7.6% from 6.8%. In short, we delivered on our commitments in 2023. These results were achieved by focusing on five key areas: leadership development; clinical excellence; employee experience; margin improvement; and growth. As we’ve outlined on prior quarterly calls, we saw progress in each of these areas throughout the year, and our positive financial results are the outcome of these efforts.
No priority has been more important to our success than leadership development. We are pleased with the progress we made in this area in 2023. During the year, we added over 50 CEOs in training or CITs and 38 local leaders earn C-level designations in their operations, including 11 local CEOs. As we’ve explained before, CEOs and other C-level leaders earned this designation by acting as true owners and creating significant financial, clinical and cultural value.
We have found that CEOs typically generate roughly $1 million more in annual earnings than our non-CEO executive directors in conjunction with better clinical and cultural outcomes. These most recent C-level recipients, along with our current C-level leaders and new CITs will be the foundation of our success moving forward and their contributions are reflected in our 2023 results.
Clinical excellence is at the heart of everything we do and clinical leadership development is a major focus. Just as we continue to train and elevate operational leaders to become CEOs, we are making similar investments in future clinical leaders to help create chief clinical therapy and wellness officers and local operations. Our clinical onboarding, training and development programs were strengthened and enhanced in 2023 and 16 clinical leaders were elevated to C-level status, which is driving excellent quality outcomes as well as patient and resident satisfaction.
In addition to leadership development and clinical excellence, I’d like to provide some data points that highlight the progress we’ve made in the other three focus areas. We made great strides in our employee engagement and recruiting during the year as demonstrated by double-digit improvement in our turnover rate. And with additional hires in the first two months of 2024, we have now surpassed 6,000 employees, a double-digit increase over year-end 2022. On the margin front, our adjusted consolidated EBITDA margin improved 80 basis points year-over-year. And from a growth perspective, our 2023 revenue increased a robust $71.7 million, approximately three quarters of which was organic same-store growth.
As we announced in our press release yesterday, we are providing guidance for the full year of 2024. We anticipate full year revenue in the range of $596.8 million to $633.7 million and adjusted earnings per share in the range of $0.82 to $0.91. The midpoint of $0.87 represents 19.2% growth on our 2023 adjusted earnings and 52.6% growth over our 2022 results. Our 2024 guidance is based on the compelling momentum in both our segments, the readiness of our local leaders to drive organic and inorganic growth and the latent potential that remains in our existing operations. We look forward to another year of strong performance and growth in 2024.
With that, I’ll turn the call over to John to provide more detail on our operational results.
John Gochnour
Thank you, Brent, and good morning, everyone. In 2023, our local teams distinguished themselves as key partners in their health care communities, driving exceptional top line growth and improved earnings in both of our operating segments. Our fourth quarter results highlighted this progress and also the considerable potential for improvement as we resolutely focus on our operational fundamentals.
Turning first to home health and hospice. Segment revenue of $106.9 million increased $16.2 million or 17.9% over the prior year quarter. This growth was a result of continued momentum in our hospice business, were a 17.8% increase in hospice ADC, a 13.1% increase in hospice admissions and continued normalization in our length of stay resulted in revenue growth of $11.6 million or 27.1% over the prior year quarter.
Our Home Health platform also continued its steady growth as Home Health revenue increased by $4 million or 9.6%. Total Home Health admissions rose 12.8% and Medicare home health admissions rose 5.6%, each over the prior year quarter. Along with strong Medicare growth, we also continued to build upon our managed care relationships and negotiate new and more favorable contracts. These contracts and improved rates increased our ability to take managed care volume, resulting in an 11.3% increase in managed care visits and a 13.4% increase in managed care revenue per visit, each over the prior year quarter.
Home Health and hospice adjusted EBITDA of $16.7 million increased $1.1 million or 7.3% over the prior year quarter. In the last half of the year, we have acquired or started eight new locations across the segment. As we have discussed before, because we often acquire underperforming operations, a heavy volume of acquisitions can contribute to some lumpiness and margin pressure in our quarterly results, but also provides compelling long-term growth opportunity. As we continue to integrate these new agencies and build the cultural, clinical and financial foundation for sustained success, we are well positioned to produce strong bottom line results in 2024.
Our clinical results remain the foundation of our success. Our local teams maintain their focus on delivering best-in-class clinical outcomes, while effectively managing utilization and expense. As part of the expansion of CMS’ Home Health value-based purchasing program, we are carefully tracking and managing performance against the value-based purchasing criteria based on initial data we are well positioned to capture positive financial incentives that the program creates to reward providers who deliver exceptional value and clinical outcomes.
Our senior living business continued its dramatic improvement. The business has stabilized and begun to grow with meaningful potential yet unrealized. Exiting the pandemic, we have invested significant time and attention to recruit and develop strong senior living leaders committed to our culture and model. These investments have led to robust top and bottom line improvement. Adjusting for divested buildings, same-store senior living segment revenue was $148.2 million, an increase of $21.4 million or 16.9% over the prior year and $38.7 million in the fourth quarter of $5.2 million or 15.7% increase over the prior year quarter.
Full year Senior Living segment adjusted EBITDA was $12.3 million, a $6.3 million or 105% increase over the prior year and $3.4 million for the fourth quarter an increase of $1.4 million or 69% over the prior year quarter. Occupancy reached a new post-pandemic high of 79%, even as average monthly revenue per occupied room for the fourth quarter rose to 4,093 an increase of $423 or 11.5% over the prior year quarter.
Turning to growth. We remain focused on our disciplined strategy of acquiring operations at attractive valuations in locations where we have strong peer operating clusters and talented leaders ready to drive results. Consistent with that strategy, we executed a steady stream of sweet spot acquisitions during the second half of 2023, including the Hospice acquisitions in Arizona, Texas and Oklahoma, we discussed in last quarter’s call.
In December, we acquired another such operation, Southwestern, Palliative Care and Hospice in Yuma, Arizona, creating a unique opportunity to serve our rural population center. We are excited that several of these acquisitions create new opportunities to serve residents of rural communities in our existing states. Our historical strength in operating in rural areas demonstrates the unique advantage of our operating model, where decisions driven by local leaders meet the needs of their patients and community partners. Each of these transitions is off to a great start in our model with talented local leadership teams, driving strong clinical and financial improvement and growth momentum out of the gate. We look forward to unlocking the tremendous potential of these acquisitions as they mature over the next few quarters.
On January 1, 2024, we established a new Home Health joint venture with John Muir Health, a leading integrated health system in Northern California. In this venture, a local tenant affiliated operating subsidiary will manage and majority own a new Home Health agency that will serve the East Bay area. Like our partnership with Script Health, this venture places us on the forefront of true care continuum development, helping support effective transitions of care between the acute setting and harnessing our home health expertise to improve clinical and financial outcomes.
We are excited to innovate with the new talented team at Muir Home Health and our partners at John Muir, while creating a new home health joint venture is a complex endeavor, the deep expertise of our strong operational team positions us for success in establishing Muir as a key solution for the Bay Area Health care continue.
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 full year and quarter ended December 31, 2023, are contained in our 10-K and press release filed yesterday. For the full year ended December 31, 2023, we reported total GAAP revenue of $544.9 million, an increase of $71.7 million or 15.1% over the prior year and adjusted EBITDA of $40.7 million, a $9.2 million or 29.1% increase over the prior year.
We also reported GAAP diluted earnings per share of $0.44 and non-GAAP adjusted earnings per diluted share of $0.73, an increase of 28.1% over the prior year. With these results, we met or exceeded updated guidance on our annual basis. Key metrics for the full year and quarter ended December 31, 2023, include $69.2 million drawn on our revolving line of credit and — or sorry, $6.1 million in cash on hand at quarter end, a 1.44 times net debt to adjusted EBITDA and cash flows provided from operations of $33.1 million for the year.
As we mentioned in our press release, we are providing full year 2024 guidance of revenue of $596.8 million to $633.7 million, adjusted EBITDA of $46.2 million to $49.7 million and adjusted earnings per share of $0.82 to $0.91. Our guidance incorporates current operations and organic growth diluted weighted average shares outstanding of approximately $30.4 million and a 26% effective tax rate.
Our 2024 annual guidance anticipates an EPS increase quarter-over-quarter, consistent with our 2023 performance and is based on a ramp in Home Health and Hospice ADC, continued occupancy improvement in senior living anticipated reimbursement rate adjustments, elevated interest rates and continued inflationary pressures, which we see lingering into 2024.
It does not include unannounced acquisitions and exclude start-up operations, share-based compensation, acquisition-related costs and onetime implementation and unusual items. Our guidance does include expected revenue from the Muir Home Health joint venture but recognizing the start-up nature of that operation assumes that earnings will ramp throughout the year, resulting in a net zero contribution to earnings in 2024. We expect cash flow from operations for 2024 to reflect organic revenue growth and bottom line improvement with increased earnings, continued effective cash collections and lower capital expenditures, we expect to strengthen our balance sheet and fund future growth.
And with that, I’ll hand it back to Brent to highlight a couple of our local leaders.
Brent Guerisoli
Thanks, Lynette. It’s my pleasure to spotlight two operations that achieved exceptional results in 2023. Their stories demonstrate the remarkable progress that can occur when local leaders behave as owners and become C-level leaders in their operations. First, I’d like to highlight Alpha Home Health and Hospice in Everette Washington, led by future CEO, George Gitungo, New Hospice Chief Clinical Officer, Courtney Petri, Home Health Clinical Director, Cindy Krall; and Chief Rehab Officer, Travis Renzi, Alpha’s leaders have set a compelling vision to meet the unique needs of their community and establish themselves as a premier home health and hospice provider.
By rallying around that vision, Alpha has created a winning culture and continues to deepen their partnerships and impact on the community. Their hard work, dedication and collaboration are apparent in their results, including strong employee satisfaction, exceptionally low turnover, a five-star home health quality score and an 11.4% rehospitalization rate versus the national average of 14.1%. Financial results have followed with a 49.6% year-over-year EBIT increase on a 30.4% increase in revenue.
In Orange County, California, future CEO; Ron Ebelito, future CMO, Elizabeth Brand Mendoza and Future CWO; Ruby Racka Magau have led Mainplace Senior Living to remarkable success. Like we did to so many communities, the pandemic took a toll on main place throughout 2020 and 2021.
Ron and team stepped into Mainplace in 2022 and improved all aspects of their community, beginning with the culture and the resident and employee experience. Because of their efforts, Main Place is now a community of choice in Orange County. Year-over-year occupancy has risen from 70% to 91%, revenue per occupied room has increased 28% and EBIT is 6 times greater than it was in 2022.
With that, we’ll open it up for questions. Daniel, can you please instruct the audience on the Q&A procedure?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Dean Sublett with Stephens. Your line is open.
Dean Sublett
Hey, good morning. This is Dean on for Scott. So in the release, you speak to the total revenue ramp throughout the year, but I just wanted to see if you could break down how you’re thinking about top line growth rates across each of Home Health, Hospice and Senior Living. And then how are you thinking about year-over-year margin trends at the segment level?
Lynette Walbom
Thanks, Dean, for your question. On a — for — our revenue growth front for our 2024 guidance for existing Home Health and Hospice operations, we look at our growth in our existing and same-store operations and also our new store acquisitional operations. With same-store growth, we expect that to be in the high single digits and new store growth in the low to mid-double digits with a blended rate in the low double digits.
As we look at our senior living operations, revenue is impacted by both occupancy increases and RevPAR and those were both factored in with occupancy increases similar to increases in 2023, and our RevPAR increases in the mid-single digits. We also continue to focus on increasing occupancy and our pre-pandemic levels to be closer to our pre-pandemic levels of 81.5.
On the margin front, we have factored in a ramp of our targeted margins on a Home Health and Hospice acquisitions. And with that, there’s a drag that occurs with those acquisitions because we take on potentially underperforming operations and transition them to our system and operating model. We continue to also have some labor pressure and inflationary concerns, which have lessened through 2023 and still expect that to continue into 2024.
On the senior living front, we have included adjusted EBITDA improvements through cost control and operational efficiency and margin gains as we drive occupancy. So as that occupancy increases, we feel that there’s some operational efficiencies there. And with those, we expect approximately a 1% increase in our margin or EBITDA expansion in both of those operations.
Brent Guerisoli
Yes. And Dean, I would just add, one of the things that we’re really excited about was the significant growth that we experienced in 2023. And we’ve done a lot of these acquisitions near the end of the year. And so on the margin front, there’s a ton of opportunity for us to take that revenue growth that we added and put it to the bottom line. And so from estimate standpoint, we’re fairly conservative and where we think we can end up by the end of the year in our guidance, but there’s certainly significant potential there to continue to drive those improvements as we go forward from the beginning of the year through the end of the year.
Dean Sublett
Okay. Great. That’s helpful. And just a couple more from us. I might have missed it in there, but just anything to call out on how you’re thinking about rate growth for senior living in 2024? And just lastly, I think you alluded to it earlier, but anything else to call out for operating cash flow and CapEx as we think about the full year? Thanks.
Brent Guerisoli
Yes. On the rate growth front, I mean, we were at double-digit rate growth again in 2023, which was great, right? And that’s due in large part due to the investments that we’ve made into the buildings, the improvements that we’ve made from a leadership standpoint and just creating a better offering overall. So we’re pretty excited about what we saw. We haven’t factored in that high level of rate growth. We’re probably about half of that. That’s what our expectation is. And keep in mind, there’s really a couple of different levers that we can pull, right? One is just the rents, right? And we pretty much across the board would expect rate increases at all of our communities.
And so I would say that probably represents a good half of where we’re going to see some of that rate growth. And then on the other front is on the carriers’ charges or the direct cost or the direct carriers that we’re providing. And so that — we’ve talked about this, I think in past calls as well. There’s a significant opportunity to continue to elevate whether that’s through improved assessment and just ensuring that we’re getting rewarded for the cares that we’re providing. And so by pulling both of those levers, we think we’re going to continue to see significant and healthy rate growth but just not quite at the same level that we saw in 2023.
And then Lynette, do you want to talk about the cash flows.
Lynette Walbom
Yes. On the cash flow front, we’re expecting operating cash flows to be in the range of $30 million to $35 million on the operating cash flow front. And then CapEx to be in line with spend that we had for this year, which was about $8 million, a little over $8 million.
Dean Sublett
Great. Thanks so much.
Operator
Thank you. I’m showing no further questions at this time. I would now like to turn it back to Brent Guerisoli for closing remarks.
Brent Guerisoli
Okay. Well, thank you, Daniel, and thank you, everyone, for joining us today. And we hope you have a great rest of your day.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
