The Pennant Group, Inc. (NASDAQ:PNTG) Q1 2024 Earnings Call Transcript

The Pennant Group, Inc. (NASDAQ:PNTG) Q1 2024 Earnings Call Transcript May 7, 2024

The Pennant Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to The Pennant Group First Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the call over to Kirk Cheney. You may begin.

Kirk Cheney: Thank you, Michelle. 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 Lynette Walbom, 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 www.pennantgroup.com. A replay of this call will also be available on our website until 5 p.m. Mountain Time on May 6, 2025. We want to remind anyone who may be listening to a replay of this call that all statements are made as of today, May 7, 2024, and 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. 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 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, 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. The GAAP to non-GAAP reconciliation is available in yesterday’s press release and is available on our 10-Q. And with that, I will turn the call over to Brent Guerisoli, our CEO. Brent?

Brent Guerisoli: Thanks, Kirk. And welcome everyone to our first quarter of the 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 $0.20 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 fundamentals has created a firm foundation in our core business and significant momentum across the company with 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 100 local CEOs, as well as Chief Clinical Officers and other C-level leaders. There are now 44 CEOs and 42 CCOs 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 CEO, 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 CEOs typically generate roughly $1 million more in annual earnings than 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 leverage 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 costs 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 when they become Pennant owners, they are partnering with a best-in-class operator as we harness our unique operating model to execute and grow.

Since our spinoff and through the challenges of a global pandemic, we have matured as an organization and added leaders across the company in 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 have 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 and 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. Our segment revenue of $116.5 million is up $25.4 million or 27.9% and segment adjusted EBITDA of $17.9 million is up $4.7 million or 35.7%, each over 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 continue 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%, each over 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 and acute care hospitalization rate of 13.4% remain well ahead of national averages, even as we transition 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 CEO and training program to help talented, ambitious, internal leaders grow their capacity to become Chief Clinical Officers. Our local leaders also use technology and adopted clinical best practices, helping to lower visits per episode by 5% to 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% and 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-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 to purchase the associated real estate and thus capture the upside that 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 acquisitions, asking first who, 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 are Capitol Hill Senior Living, a 113-unit community in Salt Lake City, Utah, and Southgate 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 operations, 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 Muir Home Health, a new Home Health joint venture with John Muir Health on January 1st. We are excited about this opportunity to work closely with a leading Bay Area Health system to deliver world-class Home Health services.

The venture is off to a strong start as we have effectively implemented home care home base and other technology solutions, put in place and elevated a talented local leadership team and established meaningful collaboration with the exceptional clinical and operational leaders at John Muir Health. We look forward to providing additional updates on the joint venture’s 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 1st, 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 continuums 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 31, 2024, are contained in our 10-Q and press release filed yesterday. The quarter ended March 31, 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 $0.20, a 53.8% increase over the prior year quarter. Key metrics for the three months ended March 31, 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 transition new operations, including multiple acquisitions executed at the end of 2023, along with the new Muir 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 million to $35 million on the year, reflecting organic revenue growth, strong cash collections and bottomline improvement. And with that, I’ll hand it back to Brent to highlight a few of our local leaders.

Brent Guerisoli: Thanks, Lynette. It’s my pleasure to spotlight several leaders in our organization who have achieved exceptional results. At Barber Station Senior Living, Executive Director, Jacob Velasquez; Clinical Director, Ray 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, and the community’s results reflect this 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, Barber Station’s employee engagement score has 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. Preceptor Home Health & Hospice, based in Milwaukee, Wisconsin, led by newly awarded CEO, Rich Firth, along with Executive Directors, Christina Wild and Heather Rogge, and Clinical Leaders, Angela Becker and Michelle Kubinski, has become the employer and provider of choice across Eastern Wisconsin. Preceptor’s 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 of 12.7%, which is well below the state and national averages.

The agency’s strong culture has produced one of the lowest turnover rates in the company. Preceptor has developed meaningful community relationships. Revenue has increased 14.8% and EBITDA has increased 58.8% each over the prior year quarter. Preceptor 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 C-level caliber local leaders step into operation. With that, we’ll open it up for questions. Michelle, can you please instruct the audience on the Q&A procedure?

Operator: Thank you. [Operator Instructions] Our first question comes from Ben Hendrix with RBC Capital Markets. Your line is open.

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Q&A Session

Ben Hendrix: Great. Thank you very much. Congratulations on the quarter. Question on 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 fragmented nature of these markets, is that the biggest gating item to development and how can we see that kind of progressing in the two segments?

Brent Guerisoli: Yeah. Great question, Ben. 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 the CEO development program is 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 as our primary focus. 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 in incredible operating leaders, is to partner them with high caliber clinical leaders that understand how to build a business and also develop other clinical leaders.

And so what’s exciting to see is, 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 to follow up on your real estate strategy, can you remind us what percentage of real estate you operate that is owned by Standard Bear and are there any purchase options on the real estate that kind of stayed with Standard Bear when you spun off from Enzyme? Thanks.

John Gochnour: Yeah. So our real estate strategy really revolves around a couple of things, Ben, and you highlighted a couple of our key partnerships. A large — a 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 continue to enjoy a really great relationship with Ensign as our landlord, as well as our partner in the Ensign 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 Bear? Is it to partner with another community partner who we’ve worked closely to develop a relationship with? And then kind of attack that in the way that makes the most sense for our balance sheet and for our operational progress. And so that’s what you saw this quarter and then in the after-acquired piece here is we did the two real estate transactions using our balance sheet and then we acquired a long-term lease with a landlord that we already had a favorable relationship with. So excited about Standard Bear and the progress that they’re making, a relationship we have continued to have with Ensign and with Standard Bear. Also, we’re excited to be kind of tapping this new opportunity for value creation through using our balance sheet for real estate acquisition.

Ben Hendrix: Thank you very much, guys.

Brent Guerisoli: Thanks, Ben.

Operator: Thank you. Our next question comes from Scott Fidel with Stephens. Your line is open.

Scott Fidel: Okay. Thanks. Hi, everyone. First question, just wanted to get your feedback on how the 1Q results came in relative to your expectations. Results definitely came in above our forecast and consensus. At the same time, you maintained guidance. So just curious on sort of how the 1Q results came in versus plan and then sort of what your triggers would be to look to potentially raise guidance if these trends continue?

Brent Guerisoli: Yeah. 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 for 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 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 to 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 after the first quarter. 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. I know that you sort of were able to achieve continued solid rate growth and then had some increase in occupancy. How would you see occupancy trending over the course of the year from here? And then remind us on your rate renewals, sort of the tempo of that in terms of 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: Yeah. There’s certainly some seasonality that we felt in our occupancy numbers in Q1 and that’s been pretty consistent the end of the year, the beginning of the end of, with the holidays 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: Yeah. Right. Just on sort of the tempo of the rate renewals on the SL side over the course of the year?