The Ensign Group, Inc. (NASDAQ:ENSG) Q1 2023 Earnings Call Transcript

The Ensign Group, Inc. (NASDAQ:ENSG) Q1 2023 Earnings Call Transcript April 29, 2023

Operator: Good day, and thank you for standing by. Welcome to The Ensign Group Inc. Q1 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, Mr. Keetch. Please go ahead.

Chad Keetch : Thank you, Gigi, and welcome, everyone. We filed our earnings press release yesterday, and it is available on the Investor Relations section of our website at the ensigngroup.net. A replay of this call will also be available on our website at 5:00 p.m. Pacific on Friday, May 26, 2023. We want to remind any listeners that may be listening to a replay of this call that all statements made are as of today, April 27, 2023, and these statements have not been nor will be updated subsequent to 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, Ensign 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 Ensign Group, Inc. is a holding company with no direct operating assets, employees or revenues. Certain of our wholly owned 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.

In addition, our wholly owned captive insurance subsidiary, which we refer to as the insurance captive, provides certain claims made coverage to our operating companies for general and professional liability as well as for workers’ compensation insurance liabilities. Ensign also owns Standard Bearer Healthcare REIT, Inc., which is a captive real estate investment trust that invests in health care properties and enters into lease arrangements with certain independent subsidiaries of Ensign as well as third-party tenants that are unaffiliated with The Ensign Group. The words Ensign company, we, our and us refer to The Ensign Group, Inc. and its consolidated subsidiaries. All of our operating subsidiaries, the Service Center, Standard Bearer Healthcare REIT Inc.

and the insurance captive are operated by separate wholly owned 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 terms we, us, our and similar words we may use today are not meant to imply nor should it be construed as meaning that — The Ensign Group, Inc. has direct operating assets, employees or revenue or that any of the subsidiaries are operated by The Ensign 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.

A GAAP to non-GAAP reconciliation is available in yesterday’s press release and is available on our Form 10-Q. And with that, I’ll turn the call over to Barry Port, our CEO. Barry?

Barry Port : Thanks, Chad, and thank you, everyone, for joining us today. Our local leaders and our teams continue to be examples of excellence in health care services as they navigate through constant changes in each of their markets. Yet again, our locally driven strategy led to continued improvement in occupancies, skilled revenue and skilled census. We were particularly pleased that we achieved sequential growth in overall occupancy for the ninth consecutive quarter, with same-store and transitioning operations increasing by 4.2% and 5.4%, respectively, over the prior year quarter. As of the end of the quarter, our same-store occupancy reached 78.8% and we continue to get closer to our pre-COVID occupancy level, which was at 80.1% in March of 2020.

The record results our leaders achieved this quarter are particularly impressive, given the ongoing disruption in the labor markets. Although we still have headwinds from these labor market challenges, our turnover is improving significantly year-over-year-over-year, and our utilization of agency labor is trending down for the fourth month in a row. We also continue to build stronger relationships with our managed care partners due to better coordination of care, increased clinical capabilities and strong clinical outcome. As a result, during the quarter, our same-store operations grew skilled mix revenue and skilled mix days by 5.4% and 3.5%, respectively, over the prior year quarter. In addition, we saw increased volume in our same-store managed care census and managed care revenue, which increased during the quarter by 9% and 11.9%, respectively.

As we evaluate our expanding portfolio, we see more organic growth potential within our existing operations than ever before. As we relentlessly follow and protect the cultural fundamentals that got us here, we are confident that we will continue to consistently achieve outstanding clinical and financial performance. As we indicated last quarter, we continue to see that our skilled mix for both revenue and census remains elevated when compared to pre-COVID levels, showing just how important high-quality post-acute services are within the continuum of care. We are pleased to see this continuous growth in skilled mix as it demonstrates the increasing and sustainable demand for skilled post-acute services. Throughout our history, we’ve demonstrated the ability to find, transition and improve our newly acquired operations.

This ability, combined with a strong balance sheet allows us to increase the number of acquisitions we closed in times of market turmoil when many operators are either choosing or being forced to exit the industry. Most of the operations we acquire are struggling clinically and financially at the time we acquire them, and they can often take many quarters to become a facility of choice in their communities and it contributes to the organization’s results. In some cases, however, if the foundation for solid clinical performance is in place at the time of acquisition, the performance can sometimes happen more quickly. During the quarter, we transitioned 17 California operations that were previously operated by North American health care. When we announced the deal last year, we indicated that we were going to inherit operations that, for the most part, came to us with a strong clinical reputation and an outstanding team of clinical leaders.

We also noted that like most of our recent deals, we expected some challenges related to higher-than-normal agency staffing prior to the acquisition as well as some additional opportunities on the expense management front. We are pleased to report that with just 2 months of operations under our belts — this large acquisition is performing ahead of schedule and is already contributing to our results. While these operations will face some continued challenges during the year, including some potential pressures on occupancy that are typical during summer months, we are really excited to have the opportunity to work together with our new partners to drive more efficiencies. We look forward to the contribution they will continue to make to this organization over the next 20 to 30 years.

In our new business ventures, we’ve seen greater improvement and better momentum. This entrepreneurial incubator program is one of the elements of our culture that helps us attract and retain outstanding leaders, which allows our proven leaders to explore new post-acute care businesses and give Ensign great investment opportunities, all while keeping the opportunities within the Ensign family. While currently, these new ventures collectively represent a very small percentage of our overall business, as we’ve shown in the past with our home health and hospice business, these opportunities have the potential to become significant. Due to our solid skill mix and very strong sequential occupancy growth as well as stronger-than-expected results from our recent acquisitions.

We are increasing our annual 2023 earnings guidance to between $4.64 and $4.77 per diluted share, up from $4.60 to $4.74 per diluted share. This new midpoint of our 2023 earnings guidance represents an increase of 14% over our 2022 results and is 29% higher than our 2021 results. We are also raising our annual revenue guidance to between $3.68 billion and $3.73 billion, up from our previous guidance of $3.55 billion to $3.62 billion. We are excited about the upcoming year and confident that our partners will continue to manage and innovate, draw the lingering challenges on the labor front. Our organization is extremely healthy, and our local operations and clinical leadership has never been stronger. Our culture and local approach that we practiced since 1999 gives us confidence that we can and will continue to innovate and grow.

While market dynamics can lead to some near-term quarterly fluctuations, we remind you that our model is built for times like these. We have seen and fully expect to see that continue throughout 2023 and beyond. Next, I’ll ask Chad to add some additional insights regarding our recent growth. Chad?

Chad Keetch : Thank you, Barry. During the quarter, the company added 17 skilled nursing operations in California, adding 1,462 operational breadth to the portfolio and 2 skilled nursing operations in Colorado, adding an additional 302 new operational beds. As we evaluate growth over the last 12 months, we can see that our discipline is paying off as we have added 42 new operations totaling 4,640 beds. While we have literally been presented with several hundred opportunities over the last 12 to 18 months, we remain patient, and we’re careful to stick to our fundamental growth principles and are pleased to see most of these operations already contributing to the bottom line. We remain confident that our operating model will continue to allow local leaders to form their own market-specific strategies and to adjust to the needs of their medical communities, including methods for attracting new health care professionals into our workforce while retaining and developing existing staff.

We continue to expect all our transitions to take time, particularly given the current labor markets. But with each acquisition, we are creating new opportunities for the next generation of leaders and look forward to working together to help each operation reach its enormous clinical and financial potential. We continue to see a wide range of large, medium-sized and small portfolios and have recently seen the pace of these new opportunities picking up over the last few months. We always place the highest priority on growth opportunities within our existing footprint and are very excited about the additions to some of our most mature markets. including Arizona, Washington, Texas and Colorado. As we carefully select acquisition targets, we prioritize those that give us exposure to new markets and states we already operate in or that enhance our service offerings in markets we’ve been in for years.

We continue to look at new states as well, but as we’ve said before, entering new states is challenging and can often take time to gain the trust of the local health care community. With the success that we continue to enjoy in South Carolina, we hope that we will be able to continue to build the Ensign footprint in nearby southern states. Our real estate investment trust, Standard Bearer is now comprised of 103 owned assets, which are leased to 75 affiliated skilled nursing and senior living operations and 29 senior living operations that are leased to the Pennant Group, Inc. Each of these properties is subject to triple-net long-term leases and generated rental revenue of $19.7 million for the quarter, of which $15.9 million was derived from Ensign affiliated operations.

Also for the quarter, Standard Bearer produced $13.2 million in FFO and as of the end of the quarter had an EBITDAR to rent coverage ratio of 2.5x. Looking forward, we are prepared for even more growth in 2023. With the recent influx of new opportunities in some of our core states, we are seeing some compelling opportunities on both the operational and the real estate front in which we hope to participate if the pricing is right. With our locally driven operating model, we have lots of bandwidth to grow across dozens of markets. And with our increased credit agreement and a healthy amount of cash on hand, we have a lot of dry powder to grow. We expect some of the industry-wide changes on the horizon to lead to even more opportunities in the near and long-term future.

Lastly, during the quarter, we paid a cash dividend of $0.0575 per share. And as a reminder, in December, we increased our annual dividend for the 20th consecutive year. And given our strength, we plan to continue our 21-year history of paying dividends into the future. We also continue to delever our portfolio, achieving a lease adjusted net debt-to-EBITDA ratio of 2.06x, which is particularly impressive given the amount of growth we have taken in the last year. Currently, we have over $590 million in available capacity under our line of credit, which when combined with the cash on our balance sheet, gives us more than $900 million in dry powder for future investments. We also own 108 assets, of which 103 are held by Standard Bearer and 84 of which are owned completely debt-free and are gaining significant value over time, which adds even more liquidity to help us with future growth.

And with that, I’ll turn the call over to Spencer Burton, our COO, to add more color around our operations. Spencer?

Spencer Burton : Thank you, Chad, and hello, everyone. In his opening remarks, Barry emphasized the significance of locally driven leadership and our ability to thrive in spite of the significant market challenges. I’d like to share a few facility examples that illustrate how leaders are finding ongoing success by customizing their operations to the needs and opportunities in the communities they serve. The first example comes from West Texas. The medical launch of Amarillo was acquired in November of 2020 during the height of the COVID pandemic. On the transition, this 102-bed facility had a census of just 38 residents, 2 of them skilled patients. And the operation was struggling mightily with clinical challenges, low staffing and a poor reputation in the community.

In spite of the challenges, our local team went to work building a culture and strengthening clinical capabilities. And over the past years, its results and reputation have drastically improved. For example, staff turnover has decreased as the medical lodge has become an employer of choice for post-acute professionals in Amarillo. With increased clinical talent, the facility has been able to improve census and skilled mix significantly while also completely eliminating contract labor. The emphasis on quality is naturally driving financial results. In Q1, occupancy averaged 83%, up from 61% in Q1 of 2022. And the facility now enjoys a skilled mix of over 50%. As you’d expect, quarterly net revenue and EBIT improved drastically, up by 69% and 324%, respectively, over prior year quarter.

The results are impressive. But CEO, Chris Cantrell and [DOM, Carol Tusik] aren’t satisfied yet. They and their team remain humble and hungry to learn and to apply new approaches to improving outcomes and results. One example of that occurred last year when Carol traveled from Amarillo to Mesa, Arizona to visit Montecito, an Ensign affiliated facility that leads the entire organization in monthly admissions by providing high acuity solutions to hospital and managed care partners. Carol was inspired. And since that visit, she and her nurse leadership team have worked relentlessly to build clinical competence and to offer unique high-acuity programs at the medical launch. The Amarillo health care community is taking note. Medicare days have increased by 78%, and managed care days have grown by an incredible 120% as the facility has gained preferred provider status with multiple plans.

Not only does the medical logsitary illustrate the enormous upside in transitioning operations, it also demonstrates the endless opportunities for improvement that come as our operators seek for and share best practices, peer-to-peer, even across state lines. Speaking of best practices, our second facility example is an operation that’s been affiliated with Ensign since 2004. During that time, North Mountain Medical in Phoenix, Arizona has innovated and raised the bar over and over again. During the past decade, this team has accomplished multiple deficiency 3 CMS surveys and consistently maintain 5-star quality and overall ratings. They have done this while carrying for an ever-increasing level of acuity. Today, 100% of their patients require complex respiratory care, while many of these residents also received bedside dialysis.

The facility also has an in-house wound care team that allows them to care for and heal wounds that would normally require patients to stay in a much more expensive LTAC or acute hospital. For years, North Mountain has been one of the top performing facilities in the entire organization as it has grown acuity, skilled mix and added clinical capabilities that serve the community needs while concurrently growing revenues. In spite of this, the facility continues to find ways to improve performance. It is the quintessential example of the boundless potential that exists in even the most mature same-store operations. For example, in Q1 of this year, the North Mountain team led by CEO, Jeremy Bowen; and COO, Jackie Green, grew occupancy from a respectable 81% to an incredible 96%, while also increasing skilled revenue mix to over 94%.

As occupancy increase, the team can currently focus on hiring and retention and successfully eliminated their dependence on agency nurses. The team proactively develops innovative processes for attracting and training caregivers and then supporting those caregivers as they gain additional skills and credentials. Despite being a very busy environment, North Mountain makes each employee feel like family as evidenced in the facility having the lowest turnover rate among skilled nursing facilities in the Phoenix market. As North Mountain continues to achieve excellence in clinical and cultural measures, financial results invariably follow. For example, in Q1, the facility grew its total net revenue by 21% over prior year quarter, while EBIT increased by 63.9% for the same period.

North Mountain continues to provide an example of excellence to the entire organization while demonstrating the enormous potential that legacy operations have to continue to grow results. We hope that these examples are helpful in illustrating some of the many different levers our local operators are pulling in order to meet the needs of their health care continuum partners. With that, I’ll turn the time over to Suzanne to provide more detail on the company’s financial performance and our guidance, and then we’ll open up for questions. Suzanne?

Suzanne Snapper : Thank you, Spencer, and good morning, everyone. Detailed financials for the quarter are contained in our 10-Q and press release filed yesterday. Some additional highlights for the quarter include the following: GAAP diluted earnings per share was $1.05, an increase of 18%. Adjusted diluted earnings per share was $1.13, an increase of 14.1%. Consolidated GAAP revenues and adjusted revenues were both $886.8 million, an increase of 24.3%. GAAP net income was $59.9 million, an increase of 18.9% and adjusted net income was $64.6 million, an increase of 14.6%. Other key metrics as of March 31, 2023 include cash and cash equivalents of $327 million, cash flow from operations of $48.3 million and $593 million of availability on a revolving line of credit.

We also wanted to address the current status of the state of emergency and reimbursement matters. With the public health emergency ending on May 11, 2023, the majority of the states we operate and have adopted programs that will either increase the Medicaid rate or continued enhanced Medicaid funding throughout the end of the year, ensuring a relatively smooth transition. As Barry mentioned, we are providing updated annual earnings guidance of $4.64 to $4.77 per diluted share and annual revenue guidance of $3.68 billion to $3.73 billion. We have evaluated multiple scenarios and based on the strength in our performance and the positive momentum we’ve seen in occupancy and strong skilled mix and as well as some additional strength in Medicaid and Medi — programs have led to the increase in our guidance.

Our 2023 guidance is based on diluted weighted average common shares outstanding of approximately $57.7 million; a tax rate of 25%; the inclusion of acquisitions closed to date, the inclusion of management’s expectations of Medicare and Medicaid reimbursement rates net of provider tax; and with the primary exclusion coming from stock-based compensation. Additionally, other factors that could impact quarterly performance include variations in reimbursement systems, delays and changes in the state budget, seasonality occupancy and skilled mix, the influence of the general economy on census and staffing, the short-term impact of our acquisition activities, variations in insurance accruals, surges in COVID 19 and other factors. And with that, I’ll turn it back over to Barry.

Barry?

Barry Port : Thanks, Suzanne. It’s always important to us that we take just a minute again to thank our incredible team members, facility leaders, field resources, clinical partners and service center support staff. I can’t emphasize enough how incredibly honored and grateful we are to work alongside them and to witness their amazing sacrifice, effort and outcomes. Many of them have picked up extra workloads in the face of staffing challenges, rolled up their sleeves to help us transition dozens of operations in the last many months and have made other sacrifices for the benefit of their coworkers, patients and the organization. Their commitment in serving their communities and one another has blessed the lives of so many. It’s absolutely astounding to witness and an honor to be a part of that effort.

Just as we’ve seen in the past, we most certainly expect some challenges ahead. However, we will lean on the lessons that we have learned and we’ll continue to build on our foundational strength. We’re excited about our future and look forward to continuing to show our dedication to all those that have entrusted us with the care of their loved ones. And now we’ll turn the call over to the Q&A portion. Gigi, can you please instruct the audience on the Q&A procedure?

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Scott Fidel from Stephens.

Operator: One moment for our next question. Our next question comes from the line of Ben Hendrix from RBC Capital Markets.

Operator: Thank you. I would now like to turn the conference back over to Barry for closing remarks.

Barry Port : Thank you, Gigi, and we want to thank everyone for spending their time with us today and joining us on the call. Have a good day.

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