Pennant Group Inc
NASDAQ:PNTG
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Earnings Call Analysis
Summary
Q3-2023
Pennant Group reported Q3 2023 with remarkable growth, buoyed by revenue spiking to $140.2 million, a solid 18.5% increase year-over-year. Adjusted EBITDA rose a robust 37.8% to $10.9 million, and adjusted EPS climbed 42.9% to $0.20. A healthy operational cash flow of $12.4 million was recorded. This performance has allowed Pennant to boost its full-year 2023 revenue forecast to $526-531 million, with adjusted EBITDA expected between $39.4 and $42.6 million, and EPS guidance adjusted to $0.69 to $0.75.
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Good day, and thank you for standing by. Welcome to the Pennant Group Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Mr. Kirk Cheney. Sir, please go ahead.
Thank you, Chris. 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 5:00 p.m. Mountain on November 8, 2024. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, November 8, 2023, 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, Inc. is a holding company with no direct operating assets, employees or revenues. Certain of our independent operating subsidiaries, collectively referred to as a Service Center, provide accounting, payroll, human resources, information technology, legal, risk management and other services, the other operating subsidiaries to contractual relationships with such subsidiaries. We're at Pennant, company, we, are and us, referred 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 and our in similar terms used today are not meant to imply nor should be considered 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. A GAAP to non-GAAP reconciliation is available in yesterday's press release and is available in our 10-Q. And with that, I'll turn the call over to Brent Guerisoli, our CEO. Brent?
Thanks, Kirk, and welcome, everyone, to our Third Quarter 2023 Earnings Call. First, I'd like to recognize our remarkable local teams and service center partners, worked tirelessly to provide life-changing service to our patients, residents and clients each day.
The results we share today are the culmination of the passion, commitment and hard work of nearly 6,000 talented individuals across the organization. We truly appreciate your consistent contributions. We are pleased to report another quarter of strong growth and solid execution. Collectively, our Q3 consolidated results reflect revenue of $140.2 million, an increase of $21.8 million or 18.5% over the prior year quarter.
Adjusted EBITDA also grew significantly to $10.9 million, an increase of $3 million or 37.8%, over the prior year quarter. Adjusted earnings per share for the quarter were $0.20, an increase of $0.06 or 42.9%, over the prior year quarter. We also generated a healthy $12.4 million of cash flow from operations in the third quarter. Given our solid performance in both business segments, we are increasing our full year 2023 guidance to revenue of $526 million to $531 million. Adjusted EBITDA of $39.4 million to $42.6 million and adjusted earnings per share of $0.69 to $0.75.
These gains are the result of our continued commitment to the 5 key focus areas, we have discussed throughout 2023, leadership development, clinical excellence, enhanced employee experience, acquisitions and organic growth and margin improvement. The focused efforts of our local teams and clusters, which are at the heart of our unique operating model, have generated steady progress, across our Home Health, Hospice and Assisted Living business lines.
Our strong operational results are exciting, and we are just beginning to see the fruits of our investment in leadership. As we have pursued this long-term leadership initiative, we have seen positive impacts in our local operations and culture, turnover and quality outcomes, which in turn have established them as the local providers of choice and driven strong top line growth.
Building on the 140 basis point improvement in the second quarter, our consolidated adjusted EBITDA margin improved another 10 basis points sequentially in Q3. We are driving bottom line improvement through the remainder of 2023 and beyond, by prudently managing utilization and productivity, optimizing service line and reimbursement mix and urgently addressing underperforming operations.
As Home Health, Hospice and Senior Living industries continue to experience change, our operating model is ideally suited to excel in this environment. Our model enables us to adapt and respond to changing circumstances and market needs, on a macro and local level. It also allows us to be nimble and take advantage of unique opportunities, including payer relationships, preferred provider networks and localized reimbursement programs.
In this dynamic environment, our local leaders and clusters use technology and transparent data reporting to accelerate their clinical and financial results. With momentum in our results and a 1.3x net debt to adjusted EBITDA leverage ratio, we are poised to pursue our disciplined acquisition strategy, which begins with answering the question, first to then what.
Our relentless focus on recruiting and developing talented leaders has created a bench of prepared CEO caliber leaders capable of stepping into transitions and driving immediate improvement through the principles of our operating model. Next, we grow in areas, where we have strong existing leaders, operations and clusters prepared to wrap their arms around new operations to help improve clinical, cultural and financial results.
Finally, we look at potential opportunities in the marketplace that meet our valuation criteria. Over the last decade, we have seen that our disciplined approach to pricing has created unique opportunities for local leaders to generate solid financial returns. Today, we are seeing more potential acquisitions that are consistent with our valuation expectations. This existing strong alignment between able and eager local leaders and compelling acquisitions and growth opportunities, will be a powerful catalyst for future growth under our model. With that, I'll turn the call over to John to provide more detail on our third quarter operational results.
Thank you, Brent, and good morning, everyone. We are pleased to report that our local leaders drove meaningful progress in each of our operating segments during the third quarter, creating the opportunity for a strong finish to 2023 and putting us on pace for a solid execution in 2024.
Our Home Health and Hospice business continued to progress with segment revenue of $101.5 million, an increase of 18.3% over the prior year quarter. This improvement was driven by robust growth in our Hospice business, where average daily census increased 17.7% and Hospice revenue increased to $50.4 million, a 24.3% increase, each over the prior year quarter. Our Home Health business showed remarkable resiliency and despite the negative impacts of last year's rate adjustment, Home Health revenue grew to $51.1 million, a 12.7% increase on admissions growth of 6.7%, each over the prior year quarter.
This census and revenue progress is making its way to the bottom line as Home Health and Hospice segment adjusted EBITDA of $15.9 million increased by $1.7 million or 11.9% over the prior year quarter and $1.5 million or 10.5% sequentially over Q2.
Home Health and Hospice adjusted EBITDA margin also improved sequentially for the second consecutive quarter, rising to 16.1% from 15.5%, a 60 basis point increase. With our strong revenue growth, we see additional opportunities for margin improvement, by continuing to carefully manage productivity, utilization and ancillary an indirect expense.
Last week, CMS issued the 2024 Home Health DPS final rule, which includes a headline 0.8% increase in Medicare fee-for-service payments. A significant improvement from the 2.2% net reduction in the proposed rule. Based on our initial modeling, we anticipate a net 0.1% positive impact across our episodes of care. In delaying some of the behavioral adjustment cut originally proposed, CMS has acknowledged a financial headwind Home Health provider space, due to the current inflationary environment.
While the final rule leaves some level of uncertainty regarding future reimbursement, we will continue to work with CMS and policymakers to ensure that patients have access to high-quality, critically needed Home Health services. As the lowest-cost health care setting, Home Health must be a key component of our nation's strategy to improve health outcomes while reducing aggregate national healthcare spend.
Given the attention, Home Health reimbursement changes have received, we think it is important to remind listeners that Medicare Home Health is only a portion of our diversified business. Specifically, Medicare Home Health revenue comprises 17.2% of Pennant's consolidated revenue and 23.7% of our Home Health and Hospice segment revenue. Despite the flat Medicare home health rate update, our growth profile is promising for several reasons.
First, the 2024 hospice rate adjustment, which will have a projected 2.8% positive impact on our Hospice revenue beginning in the fourth quarter of 2023. Second, favorable pricing updates with our managed care payers, where momentum continues and revenue per visit has increased 6.9% year-to-date.
And third, our local leaders' ability to adapt to changing reimbursement through effective utilization and care planning and sound by natural management. In our Senior Living business, the leading indicators of strong performance continued to improve capable leaders, increasing occupancy and rising revenue per occupied units. Senior Living segment revenue of $38.7 million is up 18.9% and Senior Living segment adjusted EBITDA of $3.1 million increased 109.6%, each over the prior year quarter.
Same-store occupancy edged closer to prepandemic levels, reaching 80.1%, an increase of 250 basis points and same-store revenue per occupied unit increased by 11.7%, each over the prior year quarter. In Q3, our Senior Living adjusted EBITDA margin also tracked favorably, increasing by 340 basis points, compared to Q3 of 2022. Our Senior Living leaders are laser-focused on continuing to drive occupancy and revenue gains to the bottom line, in the near and long term.
We continue to methodically and effectively execute on our acquisition strategy. As we acquired 5 hospice provider numbers in new markets, close to our existing operations since our last earnings call. In September, we acquired Valor Hospice Care, with locations in Sierra Vista and Green Valley, Arizona. This acquisition adds 2 new Arizona geographies, that complement our existing Home Health and Hospice strength in Southern Arizona.
After quarter end, we acquired Guardian hospice, with locations in Northern Texas and Southern Oklahoma. These acquisitions expand our footprint in states where we have had significant success, particularly in more rural geographies. We are excited to serve these new communities and become the provider of choice.
Finally, to complement and expand our existing Bay Area operations, we also acquired a hospice license in Concord, California, allowing one of our most successful Hospice agencies to expand its service area. The Valor and Guardian acquisitions are examples of the attractive deals, were seen in our sweet spot, sized and priced appropriately in areas with strong leaders, ready to step in and build and strong clusters ready to support.
Over the last few months, we have seen changes to the market for Home Health, Hospice and Senior Living transactions, that are creating more opportunities for disciplined growth. With our strong balance sheet and improving cash flow, we expect to continue growing through the remainder of the fourth quarter and into next year. With that, I'll hand it to Lynette for a review of the financials. Lynette?
Thank you, John, and good morning, everyone. Detailed financial results for the 3 months ended September 30, 2023, are contained in our 10-Q and press release filed yesterday. For the quarter ended September 30, 2023, we reported total GAAP revenue of $140.2 million, an increase of $21.8 million or 18.5% over the prior year quarter.
We also reported GAAP diluted earnings per share of $0.15, a 6.3% decrease over the prior year quarter and non-GAAP diluted earnings per share of $0.20, a 42.9% increase over the prior year quarter. Based on our strong year-to-date performance in both business segments, we are adjusting our full year 2023 guidance.
Our initial guidance issued in February 2023 included revenue of $503 million to $518 million, adjusted EBITDA of $38.4 million to $42.6 million and adjusted earnings per share of $0.66 to $0.76. Our updated guidance is as follows: revenue of $526 million to $531 million, adjusted EBITDA of $39.4 million to $42.6 million and adjusted earnings per share of $0.69 to $0.75.
Key metrics for the 3 months ended September 30, 2023, include $53.8 million outstanding on our $150 million revolving line of credit and $3.4 million in cash on hand at quarter end. 1.3x net debt to adjusted EBITDA and cash flows provided from operations of $12.4 million for the quarter and $27.9 million year-to-date.
We continue to expect healthy cash flow from operations, based on organic revenue growth, solid cash collections and continued bottom line improvement. This will enable us to respond opportunistically to potential acquisitions, while maintaining a solid balance sheet. Now I'd like to hand it back to Brent to highlight some of our local leaders. Brent?
Thanks, Lynette. It's my pleasure to spotlight a few leaders in our organization who have achieved exceptional results. At Desert View Senior Living in Las Vegas, Nevada, newly appointed CEO, Mike Trail, future Chief Wellness Officer, Abbie Santos; and future Chief Marketing Officer, Charlie Wolfe, have driven impressive growth and success.
Mike, Abbie, Charlie and team have established a culture of excellence. They have become an employer and provider of choice in Las Vegas, demonstrated by a 21% year-over-year reduction in turnover and 100% occupancy with a wait list. As the community increasingly turns to Desert View, as a trusted provider of assisted living services, Desert View's financial performance has followed with an 18.4% increase in revenue and the 105.2% increase in EBITDA year-over-year.
At Emblem Home Health, future CEO, Chris Myatt; and future CCO, Lyndsey Sevilla, have built and continued to grow an impressive Home Health operation in the Phoenix metro area. Chris, Lyndsey and their team have made targeted investments in clinical leadership and enhancing the employee experience. The strength of their leadership team has attracted additional talented staff, who have driven exceptional clinical outcomes, including a double-digit improvement in rehospitalization rates. Emblem's clinical excellence has led to meaningful growth, which coupled with effective cost management, resulted in a 10.2% increase in revenue and a 197.6% increase in EBITDA year-over-year.
These stories exemplify the power of our leadership model. We are grateful to these leaders and many others who own their operations in a way that benefits the patients, residents, employees and community partners. With that, we'll open it up for questions. Chris, can you please instruct the audience on the Q&A procedure?
[Operator Instructions] Our first question will come from Ben Hendricks of RBC Capital Markets.
I just wanted to follow up on some of your comments about the investment leadership. It seems like that's going fairly strong. And it looks like based on kind of the segment margins and the M&A you've done, maybe most of that is weighted towards Home Health and Hospice, but it seems like you're getting good returns on that investment from what you just talked about Desert View. Wondering if you could quantify how much investment you're doing annually on the leadership front and how that is segmented between the 2 business lines?
Yes, it's a great question. So I mean the leadership takes a number of different forms. Specifically with our CEOs and training. This year, our goal was to add 50 additional new leaders. And so we're well on pace to be able to achieve that next year, the number will be similar. And that division is pretty much 50-50 between the business lines.
But we'll just continue, and frankly, a lot of this is kind of a roll-up of each of our portfolio companies. They have goals and targets. They recognize their -- the acquisition opportunities that are there. So there's a little bit of just trying to match up, all right. We need to bring leaders in in preparation. We've got the strong operations. So let's look for opportunities to expand. And so it's not always going to be perfectly 50-50.
But as we've talked about in the past, our goal and what we even shared on the call, when we have success in local markets, that's where we're going to focus our -- on our leadership growth in development and those acquisition opportunities. So, from that standpoint, we feel really good about the investments that we're making, the development and the progress of the program and the leaders in the program.
And that's why we're very confident. We're just at the beginning. A lot of these leaders are still in development. And so we can deploy them, whether it's in a new opportunity or an existing operations or in branch expansions. There are so many opportunities for those leaders to go out and have a meaningful impact in their local communities.
I am seeing no further questions in the queue. I would now like to turn the conference back to Brent Guerisoli for closing remarks.
Thank you, Chris, and thank you, everyone, for joining us today. Have a great day.
This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.