The Pennant Group, Inc. (PNTG) on Q1 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the Pennant Group First Quarter 2021 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Derek Bunker, Chief Investment Officer. Sir, Please go ahead.
Derek Bunker: Thank you, Lee, and welcome, everyone. Thanks joining us today. Here with me today, I have Danny Walker, our CEO; Brent Guerisoli, our President; Jen Freeman, our CFO; and John Gochnour, our COO. 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 on Friday, June 4, 2021. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, May 7, 2021, 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.
Danny Walker: Thanks, Derek, and welcome, everyone, to our first quarter 2021 earnings call. Before I share an update on the progress of our operations, I wanted to say thank you to the many individuals across Pennant who continue to provide care to our patients and residents and serve their peers across the organization. It's been a historic and unique quarter. We celebrate their committed effort to drive their local operations forward and in the face of challenges that we've had to navigate. We are excited to report a record quarter for our Home Health and Hospice segment, as our local leaders continued to produce excellent results across the board. The extraordinary financial and clinical development throughout the segment is further evidence that our unique operating model provides a toolkit for leaders to drive significant long-term value. Our segment revenue grew 31% over the prior year quarter, thanks in part to a 48% growth in total home health admissions and 36% growth in hospice admissions as well as approximately 12% growth in home health Medicare revenue per 60-day episode and a 5.5% growth in hospice Medicare revenue per day.
Derek Bunker: Thank you, Danny. During the quarter and since, we've continued to methodically execute our disciplined investment strategy. In addition to a hospice start-up in Houston and the home care start-up in Arizona that we launched earlier this year, we announced that we acquired 2 home health agencies in Arizona, 2 home health and 2 home care agencies in Southwest Colorado, and most recently, a home health agency in Fort Worth, Texas, which complements our strong local hospice agencies and allows us to better serve the community, including our partners in the Ensign Pennant care continuum in the Dallas-Fort Worth Metroplex. Many of these strategic deals provide new platforms to serve additional patients in markets in which we already operate, while a few mark are entry into new but adjacent markets where we can best leverage our cluster model to support local leaders as they tailor their agencies to become the local provider of choice. We are excited about the prospects in our Home Health and Hospice deal pipeline and our ability to continue growing through the acquisition of strategic and underperforming agencies. As Danny described, we are working urgently to further develop strength in our senior living markets and leadership pipeline. As we mentioned last quarter, we have not allocated and do not anticipate allocating capital for acquisitions in the senior living space in the near term, except where clusters are exhibiting operating strength, as our leaders focus their efforts on driving improved results in our existing buildings. Overall, we are positioned to do very well and to continue our acquisition strategy, and we're excited for the growth opportunities for the rest of 2021 and beyond.
Jen Freeman: Thank you, Derek, and good morning, everyone. Detailed financial results for the 3 months ended March 31, 2021, are contained in our 10-Q and press release filed yesterday. For the 3 months ended March 31, 2021, we recorded total GAAP revenue of $105.7 million, an increase of $13.8 million or 15% over the prior year. GAAP diluted earnings per share of $0.03 and non-GAAP adjusted earnings per diluted share of $0.11. Other key metrics include $119.2 million available on our revolving line of credit and $5.6 million cash on hand at quarter end, 0.56x net debt to adjusted EBITDA and 1.37x if Medicare Advance payments had been paid back as of the quarter end. Our operating cash flows declined since the beginning of the year, reflecting a temporary dip due to the impact of the final phaseout of the request for anticipated payment of about 8% of revenue, along with onetime cash outflows for prepaid software costs related to our new system implementation. As a reminder to our listeners, our results do not include any funds from the Provider Relief fund established by the CARES Act. We continue to benefit from the receipt of approximately $28 million in advanced Medicare payments and approximately $7.8 million from the CARES Act payroll tax deferral program as of quarter end. Automatic recoupment of the advanced payments began in April 2021, of which we have repaid $1.4 million through May 6, 2021, and we expect it to continue through 2021. Please note that our non-GAAP adjusted earnings per share results for the 3 months ended March 31, 2021, include the effects of all COVID-related expenses and lost revenue as well as the benefit of Medicare sequestration release. As Danny mentioned, we expect our quarterly results to reflect some lumpiness as we confronted the acute impacts of the pandemic in our senior living segment. However, we remain confident in our ability to realize significant growth through the remainder of the year and beyond. As a reminder, our full year 2021 revenue guidance is $430 million to $440 million and adjusted earnings per share guidance is $0.89 to $0.99 per diluted share. The strong momentum we have continued to experience in our Home Health and Hospice business lays the foundation for us to achieve our year-over-year growth. We are cognizant of the impact of our first quarter results from our senior living business, and we anticipate better performance in the rest of the year with contributions more heavily weighted towards the second half of the year.
Danny Walker: Thank you, Jen. In our typical practice, we'd like to take a few minutes to share a few examples of the extraordinary leadership displayed by many throughout our organization. First, led by Chief Executive Officer, Jordan Baker; and Director of the Patient Care Services, Christine Williams, Sequoia Home Health and Hospice in Milpitas, California, has experienced significant growth during a challenging year. As Jordan and Christine methodically worked to surround themselves with a talented, motivated team infused with our core values, the community began to take notice. They began to invest in and expand their services and address the needs of the community that were not being adequately met. This locally tailored approach to health care has produced exceptional clinical and financial results. Their home health agency has maintained at least a 4.5 star rating throughout 2020. During the first quarter of 2021, they increased their revenue by 254% over the first quarter of 2020, which itself was an increase of 121% over 2019. At the same time, they drove significant margin expansion and earnings improvement. Sequoia is just scratching the surface of its potential under Jordan and Christine, and they are just 2 examples of dozens of leaders throughout our Home Health and Hospice segment, driving incredible results by addressing the demands of their local health care communities. Next, on the senior living side, led by Executive Director, Alexa Lewis; Wellness Director, Sarah Walton; and the operations manager, Tammy Mangum; the Windsor Court team in Weatherford, Texas prepared themselves last year well in advance of the COVID-19 outbreaks. In the early days of the pandemic, they implemented strong health care protocols, built staffing contingencies, created new ways to keep residents active and enhanced communication for residents and their families. As a result, the staff, residents and families had a high level of confidence in their team. As the pandemic spread, Alexa and team were able to steadily increase their occupancy going from 90% in the first quarter of 2020 to 96% in the third quarter of 2020, where they have since maintained. Revenue in the first quarter of 2021 increased 5.4% over the first quarter of 2020, despite Texas experiencing a spike in COVID-19 cases and a historic winter storm during the quarter. This kind of performance is achievable in all of our senior living communities as we continue to attract and develop leaders like those at Windsor Court. There are others in the organization, and we want to express our deep appreciation for their work this quarter. Although it was a difficult quarter, there's a lot that we remain very, very hopeful about and that we believe we will see that realized in the second half of the year and lay a great foundation for our results in the years to come. Now we will turn to the Q&A portion of the call. As Derek mentioned earlier, we're here with Brent Guerisoli, the President of the Pennant Group; and John Gochnour, our COO; both of which will be available and participate in answering questions. Lee, can you instruct the audience on the Q&A procedure?
Operator: First question comes from the line of Scott Fidel from Stephens.
Scott Fidel: First question, just wanted to drill into just understanding the weather and COVID-related impacts in the first quarter and just synching that up with maybe how we were modeling it. So Dan, you mentioned -- you already mentioned that it sounds like there's around a $1.5 million adverse impact from the Texas weather that was obviously unanticipated in the first quarter. Just to follow-up with that, interested if there was any impact that you could size for the Home Health and Hospice operations as related to the weather? And then also, you had changed how you're reporting the COVID expenses and now essentially baking those costs into adjusted EBITDA. I understand that you're not specifically estimating those, but that was a change relative to how we were modeling. So interested if there's any sort of general thoughts that you have around comparable COVID cost for PPE supplies and other costs that you had been previously backing out of your adjusted EBITDA?
Danny Walker: Yes. Good. Thanks for the question, Scott, and it's great to visit with you. First, on the weather, we've devoted time to quantifying things a lot more in detail on the senior living side because of some of the claims that we're processing and how disruptive it was particularly to a few of the facilities. All of them were affected significantly. All of our staff were affected significantly. We have not -- we haven't quantified those impacts in detail on the Home Health and Hospice side of things. But in general, it was disruptive in terms of missing visits, staff needing to hand things off over time. We don't generally try to highlight those things and create a sense of -- this is why we didn't achieve what we were planning to achieve. But it's fair to say there it was a very real thing. It wasn't insignificant. We obviously performed really well on the Home Health and Hospice side through those challenges. But -- so we don't -- I don't have -- unless Jen has more particulars there. We just -- we tend to just operate through these things. We got stung a little bit in this first quarter, particularly in our senior living business. And in general, what it tends to do is it just highlighted certain areas where we know we need to be better, and we're taking full advantage of those opportunities to improve as they do. Now as it relates to your second part of your question, on how -- what's included and excluded. Jen, can you tackle that?
Jen Freeman: Yes. So thank you for the question. This is Jen. I just wanted to let you know that the COVID expenses are becoming part -- more a part of our normal daily operations. So we did capture about $700,000 to $800,000 in the first quarter of COVID expenses. But then as we're continuing to buy supplies to make sure that we're protecting our residents and our patients, that's becoming more and more part of our normal cost. And then that's -- so it's approximately the same as what our estimates are, or approximately the same as what we received in sequestration relief. But then remember that we also have lost revenue from the impact of COVID in comparison to the momentum we had in the first quarter of 2020.
Scott Fidel: Okay. Got it. And that's just helpful even to get that sort of $700,000 to $800,000 in terms of just trying to get some framing of that. Then so the second question would just be maybe thinking about the trajectory over the rest of the year towards achieving the guidance, which you reaffirmed. It actually looks like the revenue trajectory was right on track in the first quarter and especially given some of the strength in the Home Health and Hospice side. So it really was as you attributed more on the margin side and with some of these unique factors in the first quarter. So I guess just on that margin trajectory, maybe help us think about how you're thinking about that ramp over the rest of the year. I know you do expect more of the improvement to be in the back half of the year, but any more detail you can give on sort of that margin seasonality. And then also, just, I guess, within that, on the occupancy side in terms of SL, if you had a spot estimate of where things are running right now as we try to -- as compared to how you're thinking about the back half of the year, as we try to just sort of drill in, in our model into modeling that occupancy. So there's a couple of things in there, but thoughts on each of those would be helpful.
Danny Walker: Yes. Just high level, and then I think Brent and Jen may have some thought specifics on the numbers related to the margins. But this confluence of events with COVID. COVID had not peaked in any of the states we were operating in, with the exception of perhaps Washington, where we have only 1 facility. So COVID peaked in the quarter in California, in Texas, in Wisconsin, Arizona and Nevada. I mean it was -- it kind of all came to a head at the same time. So I expect and what we're anticipating is, and we're already starting to see the beginnings of this transformation in March and April. But all of a sudden, all of that emergency-related margin compression is starting to ease up. And there are some elements of it that are -- may take a little longer to work through, as Jen mentioned, managing of supplies. It's just -- it's a new expense that we think will continue. Our leaders will make adjustments accordingly, right, in terms of how they're staffing and how they're working with the residents to capture those expenses in that process. But it's -- we'll see that gradually, I would say we're not anticipating significant dramatic improvement in margin in the second quarter, but we're already seeing the foundations that will allow us to really catch our momentum later into the third quarter and obviously into the fourth. Our leaders are just adjusting effectively now that sort of the disaster of the moment is passed and people are gaining their footing again, and we're seeing great indications of that. Brent, any particular thoughts on the margin side?
Brent Guerisoli: Well, I mean, we know that the margin historically has been a little bit cyclical as well. Q1 tends to be a little bit more difficult. And we start to -- we're seeing a similar pattern in 2021 as we've seen in prior years. And so we've seen improvement in March and in April and beyond. And in particular, on the senior living side, we've been hit pretty hard on the cost side. And so that's another one. It's going to take time to work through some of these changes that Danny just talked about. And as we start to see occupancy increase, I think we'll be able to take advantage of that margin -- the incremental margin increase on a quicker basis as we see that occupancy increase. So that's part of our expectation going forward that our cost management will improve as we see -- we're optimistic as we see that occupancy increase as well.
Scott Fidel: I was going to just follow up just to clarify on that occupancy point. Are you seeing some improvement so far already in the second quarter? Or do we think about this as something that really starts to sort of reveal itself more in more of a notable ramp in the back half of the year?
Danny Walker: Yes. So generally, we feel like it will happen more in the back half of the year, but we are seeing really, really hopeful signs there. Derek, I think, has some of the numbers keyed up.
Derek Bunker: Hey Scott. So I'd echo what Danny mentioned that we do anticipate it to be weighted towards the second half of the year. And as we mentioned last quarter, this second quarter will have some lingering weakness from this. But we are seeing some encouraging signs in the occupancy. And it's -- what I can say, it's pretty much in line with what I think others have been experiencing and reporting. Our average occupancy in March was relatively flat and ticked up in April. And the spots, our net move-ins were positive in both months, thanks to really our highest month of move-ins and lowest month of move-outs since the pandemic began. And so what we're seeing is we're starting to see, obviously, that's a positive trend, but that's coming off of, as Danny mentioned, the culmination of 2 kind of events that really probably created a short-term downward spike in that occupancy. So we'll see some of that inflection. And we'll probably need to continue to evaluate that through the second quarter, but it's certainly encouraging for us.
Scott Fidel: Got it. And then just one last one for me and then I'll get back in queue. Just hoping for some framing on what you were seeing with hospice in terms of length of stay and how that will influence your thinking on sequential ADC. For the industry backdrop, more broadly, there was length-of-stay pressure in hospice just as it relates, unfortunately, to the lower length of stay of the COVID patients. Interested in terms of how much you observed that and then how you're thinking about sequential sort of ramp in ADC. And that's it for me.
Danny Walker: Yes. John, why don't you tackle that?
John Gochnour: It's a great question, Scott, and we appreciate it. Our hospice ADC has actually held up pretty well through the quarter. Our length of stay did decline about 8%. And what we saw is this is really the result of some of the factors that we've been talking about, about the pandemic and its impact on some of our referral sources in the assisted living and the skilled nursing world. And so we're seeing that fairly modest decline, but we're pleased that the ADC itself held up. And we believe we're poised, and we've got some significant opportunity in Q2, both from organically for those operations that we've had for a longer period and also seeing some of these transitioning operations continue to tick up.
Danny Walker: So yes, our ADC was flat and -- but length of stay was down by 8%. So we're quite pleased with those results, and we think we can build from there as things continue to kind of return to something that resembles more like normal. Thanks for the question, Scott.
Operator: Your next question comes from the line of Frank Morgan from RBC Capital.
Frank Morgan: I guess just one quick one here for me. A lot of ground has been covered. When you think about your guidance that you're maintaining here relative to kind of where you are on the senior housing side, can you still make your numbers if you don't get improvement from here? Is it predicated on some level of improvement in the senior housing portfolio over the balance of the year, or can you ramp up? And -- or is there enough opportunity on the Home Health Hospice side of the business to offset some of the near-term headwinds here?
Danny Walker: Great question, Frank, and good to hear from you. We're anticipating some modest improvement in the senior living. We're not -- we're very careful to not over anticipate too much there. We want to make sure that the recovery and that the building in the senior living is consistent with our -- what we've stated for quite some time is the long-term health of that portfolio. And as we've talked about in the past, the transition away from Ensign into Pennant was the most disruptive for this group. You layer on top of that, the kind of almost immediate impact of COVID within a very short period of time of being kind of newly constituted, and then all the system cutovers. So our concerns there are very focused on making sure that what we do this year really forms the foundation for the year-over-year over year-over-year health and growth that we are demonstrating in the Home Health and Hospice space. So that's a long way of just saying we're anticipating modest improvement from the first quarter, which was a real challenge for us. So we're not -- we want them to do the right things for the long-term interest of that segment. And so we're focused on that. Jen, are there any specifics on that, that you would add?
Jen Freeman: No, I think you've covered it, Danny. I think that it's definitely the guidance is more heavily weighted or most weighted towards the Home Health and Hospice growth, in that business, and modest improvement.
Danny Walker: Yes, yes. But we're not anticipating a lot of contribution from the senior living business this year. We believe we will improve significantly. But with that, Brent, do you have any thoughts on that?
Brent Guerisoli: No. I mean obviously, we're optimistic, and we're going to drive as appropriately, as Danny mentioned, right, getting the right leadership model in place at the local leadership and driving results. And the other thing I would say is, as Danny mentioned, our Home Health and Hospice segment has continued to perform well, and we expect that. And so there are multiple paths to hitting that number, and we'll continue to work on all of those, but continuing to follow the model of driving at the local level and building strong teams for long-term success.
Operator: There are no further question as of this time. Presenters, you may continue.
Danny Walker: Thank you, Lee, and thank you all for joining us. We express our appreciation for the support of our shareholders, their belief in what we are creating, their belief in what we have created and continue to realize in the Home Health and Hospice space and look forward to demonstrating that same strength in the senior living space, which is coming off of a pretty historically challenging quarter that we view as a short-term headwind. We have a lot of excitement about the long-term opportunity there. But mostly, we're very, very excited about the overall place where Pennant's at coming through a pretty challenging first year or so as a newly traded publicly company. We're thrilled by the starting point that we have, and we're really excited about the coming years. So thank you all for joining us, and be healthy and safe. Bye-bye.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
