Enhabit, Inc. (NYSE:EHAB) Q1 2023 Earnings Call Transcript May 15, 2023

Operator: Good morning, everyone and welcome to Enhabit Home Health & Hospice’s First Quarter 2023 Earnings Conference Call. [Operator Instructions] Today’s conference call is being recorded. [Operator Instructions] I’ll now turn the call over to Mark Brewer, Enhabit Home Health & Hospice Chief Investor Relations Officer.

Mark Brewer: Thank you, Julianne and good morning everyone. Thank you for joining Enhabit Home Health & Hospice for our first quarter 2023 earnings conference call. With me on the call today are Barb Jacobsmeyer, our President and Chief Executive Officer; and Crissy Carlisle, our Chief Financial Officer. Before we begin, if you do not already have a copy, the first quarter earnings release, supplemental information and related Form 8-K are filed with the SEC are available on our website at investors.ehab.com. On Page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth on the last page of the earnings release. During the call, we will make forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control.

Certain risks and uncertainties that could cause actual results to differ materially from our projections, estimates and expectations are discussed in the company’s SEC filings, including the Form 10-K and subsequent quarterly reports on Form 10-Q, each of which is available on the company’s website once filed. We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, Reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information in the earnings release.

I’d like to remind everyone that we will adhere to the one question and one follow-up question rule to allow everyone to ask a question. If you have an additional question, please feel to rejoin the queue. With that, I’ll turn the call over to Barb.

Barb Jacobsmeyer: Thank you, Mark. Good morning, everyone. Thanks for joining us. I’d like to take a quick moment during this Nurses Week to acknowledge all our nursing professionals who provide a better way to care each and every day for our patients, families, referral sources and payers. It is our nurses alongside our other clinicians, caregivers and support staff who deserve the credit for our consistently strong quality outcomes. We firmly believe care will continue to move to the home, and the long-range growth potential is significant, particularly for the providers that can deliver the high-quality care required to help patients remain wherever they call home in a cost-effective manner. Let’s talk now about our quarter one results as we continue to make progress in two of our critical success factors for 2023, payer innovation and the recruitment and retention of clinical staff.

We are pleased with the progress we have made in both areas. The start of the year has been a busy and productive time for our payer innovation team. The most significant update is our executed agreement with a national payer that became effective May 1. Our branches are excited and ready to accept these patients they historically had to decline. In addition to this national payer, we executed agreements with 2 conveners that have national reach, both of which went effective May 1. We look forward to working alongside these conveners to solve challenges and deliver accessibility for patients for home-based care. The primary role of a convener is to create high-quality networks of post-acute providers who can lower the overall total cost of care.

They understand the need to pay competitively for timely access to high-quality care. Our data analytics and strategic finance teams have collaborated to produce information for the field to direct our local teams where to go to drive change in referral and admission patterns towards these new agreements. I have been traveling with members of our executive team visiting our local leaders. To date, we have visited branch operations and sales teams covering 159 branches. We believe it’s important to take time to sit down and be transparent as we present not only how but why we must deselect certain payers and replace them with the new regional and national agreements. We spend time walking our operations and sales leaders through the impact of not making these tough decisions and how this affects our ability to reinvest in our people and our technologies.

We sincerely acknowledge there is a patient on the other side of these tough decisions, but we remind them we did not create the need for this difficult decision the payers have. We thank our employees for remaining focused on the quality of care they provide and remind them to rely on us at the home office to negotiate these better contracts. We are confident the strong quality outcomes our clinicians drive, particularly our low readmission rates, which are 360 basis points below the national average, will continue to reinforce our value to the payers and the conveners. To put the financial impact of driving this change in perspective for you, every 5% move of non-episodic admissions under our current average rate per visit to one of our new national or regional agreements improved adjusted EBITDA by approximately $2 million annually.

This is outside any additional volume growth. In addition to our success with payer innovation, we have continued success with our recruitment and retention of clinical staff. A continued increase in our full-time nursing candidate pool drove 101 net new full-time nurses in the first quarter, 91 in home health and 10 in hospice. Our full-time vacancy rate improved 50 basis points sequentially, decreasing from 24.3% to 23.8%. We are beginning to see the impact of our staff completing orientation and ramping up their patient caseloads. We ended the quarter with only 4 hospice locations at capacity constraints and 71 in home health. 17 of these home health capacity constraint locations occurred as a result of growth to new census levels. New physicians have been posted in these locations to increase core staffing.

With improved staffing and increasing volumes, the team’s efforts around productivity and optimization resulted in a 2.3% year-over-year increase in home health cost per visit and a 4% sequential decline in cost per visit from quarter 4 2022. For hospice, the implementation of the case management model has created an increase in our cost per day year-over-year. The use of contract labor, while less than quarter 4, and additional triage and dedicated on-call resources, drove 1,000 basis points of the 13.2% increase year-over-year. Sequentially, cost per day increased 4%, primarily due to the impact of the case management model fixed costs that were added in quarter four with lower patient days in quarter one. We continue to believe these are critical resources needed to drive our recruitment and retention and our ability to accept patients from a more diverse referral source.

I am also excited to share with you a little about our first Enhabit employee engagement survey that was recently completed. 76% of our full-time and part-time staff completed the survey and their response to the question, how likely is it you would recommend Enhabit Home Health & Hospice as a place to work was above national health care benchmarks and places us in the top quartile of health care. The two top drivers of engagement were the meaningful work that we do and the organizational fit our employees feel, specifically when it comes to diversity and inclusion. We scored in the top 5% of health care on each of these drivers. With the continued progress in staffing, payer innovation and our hospice case management model, we are making additional strides towards our growth strategy.

In March, we acquired a home health agency in Evansville, Indiana, and we continue to have success with our de novo strategy. In quarter one, we opened two hospice de novos and have increased survey activity at other sites in quarter two, which is a prerequisite to obtaining our provider number. We believe we are on track to open 10 de novo locations this year. With that, I’ll turn it over to Crissy to discuss our quarter one results and guidance.

Crissy Carlisle: Thanks, Barb. Consolidated net revenue was $265.1 million for the first quarter, down $9.2 million or 3.4% year-over-year. We estimate the continued shift to more non-episodic payers in home health and the resumption of sequestration decreased revenue approximately $10 million year-over-year. While both of these items fall directly to the bottom line, adjusted EBITDA, which decreased $21.7 million year-over-year, also included increased general and administrative expenses, primarily due to increased employee group medical claims and incremental costs associated with being a stand-alone company. In our Home Health segment, total admissions increased 1.2% year-over-year as continued strong growth in non-episodic admissions offset a reduction in episodic admissions.

While episodic admissions decreased year-over-year, they increased 1.3% sequentially from the fourth quarter of 2022, driven by our new Medicare Advantage contracts that pay episodically. This represents the first episodic growth we have experienced since the first quarter of 2022. In the first quarter of 2023, our non-episodic visits grew to approximately 29% of our total home health visits. This represents an approximate 700 basis point increase year-over-year and an approximate 300 basis point sequential increase over the fourth quarter of 2022. We estimate the impact of this payer mix shift was approximately $5 million on revenue and adjusted EBITDA during the first quarter. As Barb discussed, we are making significant progress demonstrating our value proposition to payers as we negotiate new agreements with improved rates.

Our cost per visit increased 2.3% year-over-year as improved clinical productivity and optimization offset the impact of merit market increases, contract labor and a rise in employee group medical claims. The year-over-year increase in employee group medical claims impacted cost per visit by approximately 120 basis points. In our Hospice segment, we achieved a 7.1% sequential increase in admissions, while our average daily census decreased 1.8% sequentially. This decline in average daily census was the result of an increase in the number of admissions with shorter lengths of stay. We had 137 more deaths in the 1 to 30 days length of stay range than in the fourth quarter of 2022. This is due in part to our intentional diversification of referral sources and the expansion of the number of our admissions coming from facilities as patients coming directly from a facility tend to be admitted to hospice care later in their journey.

As Barb mentioned, the implementation of the case management model is the primary driver of the year-over-year increase in cost per day. Similar to the third and fourth quarters of 2022, our nurse recruitment success resulted in full-time nurses who were not at full productivity throughout the first quarter and increased use of contract labor to keep referral sources strong during that onboarding period. We now believe we have full-time nursing capacity that will allow us to reduce our use of contract labor and improve clinical productivity going forward. Our home office general and administrative expenses increased approximately $4 million year-over-year, primarily due to incremental costs incurred as a stand-alone company and increased employee group medical claims.

For the first quarter of 2022, the net overhead allocation from Encompass Health was $3.1 million, as shown on Page 26 of the supplemental slides that accompanied our earnings release. For the first quarter of 2023, we recorded stand-alone company costs of $5.1 million. These costs include expenses associated with the transition services agreement we have in Encompass Health as well as costs we are incurring to ramp up our team and their resources. In regards to free cash flow, we generated over $28 million during the first quarter. Adjusted free cash flow during the quarter benefited from the timing of payroll and a $6 million income tax refund related to overpayments in 2022. We continue to expect to generate between $49 million and $88 million of adjusted free cash flow in 2023.

Let’s transition now to the balance sheet. Information on our debt and liquidity metrics is included on Page 15 of the supplemental slides. We exited the quarter with net leverage of 4.2x. Our credit agreement requires that our ratio not exceed 4.75x. Our leverage ratio is more sensitive to changes in adjusted EBITDA than it is to reductions in debt. As we’ve noted previously, the ramp from quarter-to-quarter in 2023 is expected to be steep. The strongest quarters of 2022 were in the first half of the year and will be replaced in the trailing 12-month calculation of adjusted EBITDA by what we expect to be the lowest quarters of 2023. While net debt decreased approximately $25 million from December 31 to March 31, our trailing 12-month adjusted EBITDA decreased approximately $22 million.

This is putting pressure on our leverage. This pressure on our leverage also constrains our liquidity by effectively limiting the amount we can draw on our revolving credit facility. As of March 31, we had $107.6 million of available liquidity, including $37.6 million of cash on hand, which we believe is sufficient to support our operations and financial obligations. As a reminder, post our spin-off from Encompass Health, we’ve drawn on the revolver only once for $20 million during the fourth quarter of 2022 when we funded 3 acquisitions and made a $15 million deferred payroll tax payment related to CARES Act funds. Through today, we have repaid $10 million of that revolver borrowing and made $15 million in required payments on our term loan.

Our current forecast indicates we will continue to be in compliance with our financial covenants. Given the leverage pressures mentioned earlier, we are continually and closely evaluating our expected compliance with the covenants under our credit agreement and we’ll take all appropriate steps to proactively negotiate such covenants if needed and when appropriate. Let’s turn now to guidance. As we stated previously, we knew the headwinds in 2023 were going to be stronger in the first half of the year, and we noted the ramp from quarter-to-quarter this year would be steep. Given the increase in employee group medical claims, our quarter one results were just shy of our internal expectations. With our expansion of Medicare Advantage contracts and improved rates combined with reduced staffing capacity constraints, we expect to see improvements in our bottom line throughout 2023.

We maintain our 2023 guidance that includes adjusted EBITDA of $125 million to $140 million. Given the slightly weaker than expected first quarter results, the higher end of the range assumes sequential trends in episodic admissions in home health accelerate, the quick and smooth transition of non-episodic admissions to our new national and regional payer contracts and improved clinical productivity in hospice. With that, we will open the line for questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Brian Tanquilut from Jefferies. Please go ahead. Your line is open.

Operator: Our next question comes from A.J. Rice from Credit Suisse. Please go ahead. Your line is open.

Operator: Our next question comes from Jamie Perse from Goldman Sachs. Please go ahead. Your line is open.

Operator: Our next question comes from Jason Cassorla from Citigroup. Please go ahead. Your line is open.

Operator: Our next question comes from Joanna Gajuk from Bank of America. Please go ahead. Your line is open.

Operator: [Operator Instructions] Our next question comes from Andrew Mok from UBS Financial. Please go ahead. Your line is open.

Operator: And we have a question from A.J. Rice from Credit Suisse. Please go ahead. Your line is open.

Operator: We have no further questions. I would like to turn the call back over to Mark Brewer for closing remarks.

Mark Brewer: Thank you so much, operator, and we appreciate everybody joining our call today. As a reminder, there will be a replay of the call available on our website, and we look forward to talking to you in a couple of months when we recap our second quarter 2023 earnings. Have a great day.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.