LHC Group

Good morning and welcome to the LAC Group Second Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Eric Elliott, Senior Vice President of Finance. Please go ahead.

Thank you, Danielle, and good morning, everyone. I'd like to welcome you to LHC Group's earnings conference call for the second quarter into June 30th, 2021. We issued our earnings release last night, and I would also like to highlight that we have posted some supplemental information on the quarterly results section of our investor relations page, the supplemental deck, as well as a copy of the earnings release, the 10Q and ultimately a transcript of this call when available can be found on this page. Our supplemental deck includes our full year 2021 guidance assumptions, the impact of COVID-19, and detail on the breakdown among sector performance. All of our non-GAAP reconciliations and breakdown of adjustments are included as well. We will reference this information in our remarks today. We expect today's prepared comments from Keith Myers, Chairman and Chief Executive Officer, Josh Profitt, President, and Dale Mackel, Chief Financial Officer, to run for approximately 20 minutes to allow time for Q&A. Before we start, I would like to point everyone to our forward-looking statements on page two of our supplemental presentation and encourage you to read them carefully. They apply to statements made in this call, in our press release, and in our supplemental financial information. Now I'll turn the call over to Keith.

Thank you, Eric, and good morning, everyone. I'd like to begin, as customary, by voicing my deep appreciation and respect for our growing LAC Group family of nurses, physician extenders, allied health professionals, and administrative support staff for their unwavering commitment to excellence in providing quality care and customer service to the growing number of patients, families, and communities we are privileged to serve. LAC Group continues to be an industry leader in quality and patient satisfaction. Data published in June of 2021 by Strategic Health Programs, or SHP, shows our overall home health quality star rating improved to 4.39 from 4.23 in October of 2020. This is possible only because of this unwavering commitment of the many boots on the ground, frontline caregivers that treat our patients every day. Thank you again. Now turning to policy and legislative tailwinds, with last week's introduction of the Choose Home Act of 2021 in the Senate, We have bipartisan legislation that for the first time would provide clinically appropriate Medicare beneficiaries the option to safely recover in the privacy of their own homes following an acute inpatient stay as an alternative to more costly and restrictive inpatient post-acute care settings such as SNFs. In addition to four senators from each party co-sponsoring the Choose Home bill, We have lead sponsors from both the Senate Finance Committee and the Senate Aging Committee, including the Chair of the Senate Finance Health Subcommittee and the Chair of the Senate Aging Committee. In the near term, we expect Choose Home to be filed in the House with strong bipartisan support, including lead sponsors from committees of jurisdiction responsible for legislating health care policy. This common sense legislation will allow qualifying seniors the choice of receiving SNF-level care in the comfort of their own homes at a guaranteed Medicare savings of at least 20% of the cost of an inpatient SNF episode of care. The introduction of Choose Home was aided by strong endorsements from key organizations such as AARP, the National Council for Medicare and Medicaid Reform, Allies for Independence, LeadingAge, and other organizations representing veterans and those with disabilities. These endorsements and strong congressional support positions Choose Home for consideration in the budget reconciliation process or other year-end legislative packages. I'd like to mention that Choose Home conceptually is not new. Various states have already demonstrated cost savings and better outcomes by combining skilled and personal care services, such as the Ohio Passport Program, which has been in place since the early 90s and has consistently demonstrated both cost savings and better patient outcomes. Similarly, since 2019, CMS has provided Medicare Advantage plans the option to include non-skill home care services, transportation, home modification, and assistance with activities of daily living as part of their plans. Choose Home combines these services with the traditional Medicare home health benefit and for the first time provides traditional Medicare beneficiaries the option to recover safely in their own homes as an alternative to more costly and restrictive inpatient post-acute settings. Cost savings are hardwired because Choose Home limits payment to not exceed 80% of the monthly cost of a stay in a skilled nursing facility and limits the benefit to 30-day episodes of care. Medicare savings under Choose Home were projected by the healthcare economics firm of Dobson and DiVonzo to be in the range of $1.6 billion to $2.8 billion over 10 years. A copy of the Dobson-DeVonzo Choose Home Saving Analysis is included in our supplemental deck. Last month, LAC Group commissioned a national survey led by Dr. Frederick Barber of the Decision Company in Nashville. The finding was that Americans overwhelmingly prefer in-home care following a serious illness or hospitalization as opposed to inpatient post-acute settings. Notably, survey respondents strongly supported Medicare coverage for the various services provided under Choose Home, such as transportation, medical supplies, and in-home modifications. A copy of the survey results fielded by the decision company is included in our supplemental debt. We expect these survey findings favoring more in-home care to resonate in Congress and aid our advocacy for Choose Home. Now turning to regulatory updates, CMS has published favorable final rules for fiscal 2022 related to both hospice and LTACs. We also saw a favorable proposed rule for home health that projects no cuts for 2022 and an aggregate increase in payment rates of 1.7%. The rule also included a proposal to expand nationally the home health value-based payment demonstration from nine states to all 50 states beginning January 1, 2022. The national expansion of HHVPP is supportive of our recently announced Advanced Care at Home Service Line expansion, which further leverages our existing post-acute capabilities to provide an efficient, low-overhead alternative to more restrictive and costly inpatient care settings. The opportunity we have to bring our advanced care at home model to scale is substantial, as we have significant direct experience in this area from the proven and highly successful SNF diversion programs we have developed in partnership with a number of hospitals throughout the country, beginning with Ochsner Health in 2014. And now last, but certainly not least, I'll close my prepared remarks with an overview of M&A. Excluding only 2018 when we announced our merger with Almost Family, 2021 to date has been our best year in terms of acquired revenue in the 27-year history of LAC Group. Based on our success thus far, our strong M&A pipeline and the exclusive nature of the majority of opportunities in our current pipeline we have more than doubled our previous acquired revenue target for 2021 to a range of $350 million to $500 million in acquired revenues. The incremental adjusted EBITDA contributions from these acquisitions alone would add a 12% to 17% increase in 2022 compared to our 2021 range for adjusted EBITDA. And I'll turn it over to Josh to provide more color on our growth and operations Then Dale will provide more detail on our financial results and guidance prior to Q&A. Josh?

Thank you, Keith, and good morning, everyone. Thank you for your time this morning. I also want to take just a moment to thank all of our colleagues on the front line as we continue to provide much-needed, high-quality services to our patients during the public health emergency, as well as all of our quality operations and growth leaders and support team members across the country for all of their many contributions to our success. I'm truly inspired by the amazing work you are all doing. I'm very excited to provide more details on our current operational growth trajectories and explain the confidence that underlies the positive outlook Keith just described and implied in the more than doubling of our acquired annual revenue expectations for 2021. In addition to our usual commentary, you will note that we have provided updates in our supplemental deck on our earnings building blocks, our sequential operating trends, the partnership with SCP Health, our pipeline activity, and our debt and liquidity metrics. The overarching messages I want to leave you with before we begin is, one, that overall Q2 is in line with what we anticipated with continued strong growth in home health admissions and EBITDA, as well as organic admissions growth and census growth in our hospice segment with improvements in length of stay and admit to discharge ratios. Two, our M&A activity is at an all-time high, which will lead to further accelerated growth momentum heading into 2022. And three, our value proposition for our partners has never been more compelling. Let's now turn to our key metrics. We are delivering strong year-over-year growth in organic admissions and census across the board, as well as positive sequential momentum in our key performance indicators. Slide 17 and 18 of our deck show the progression over the last five quarters. You will note that same store home health organic admissions are up 16.4% in Q2 over Q2 last year and are up 7.3% year to date. When you peel back the details on the strong organic growth performance in the quarter for home health, I would note that Medicare same store organic growth was 8.8% in Q2 and non-Medicare episodic admits grew organically by 37%. I also want to highlight that total same-store admissions for home health are sequentially up 1% from Q1, which gets us above 109,000 total home health admits and to a level ahead of our all-time high, which we achieved in the first quarter of last year, just north of 108,000. Sequentially, Medicare same-store admits were up 1.2%, Non-Medicare episodic same-store admits were up sequentially 4%, with home health census up 1.9% and home health new physician referrals up 0.7%. In hospice, organic growth in admissions was up 1.1% for the quarter and 4.7% year-to-date, with average daily census also up from Q1 by 1% and 3.1% since Q4. A few additional positive indicators for the continued improvement in our hospice segment performance are that our admit to discharge ratio was positive for the first time since the onset of the pandemic, and our average discharge length of stay has stabilized for two consecutive quarters at just shy of 80 days in Q1 and Q2, while June, July, and early into August, it has been running back north of 80 days, which is now back to pre-pandemic levels. We are also working hard to support this growth with our hiring and recruiting efforts as demonstrated on slide 16. For the third consecutive quarter, we have hired a record number of frontline employees while our turnover continues to be well below industry averages. These headcount statistics have a direct correlation and validation with our differentiated culture, our continued census growth, and our unwavering focus on patient satisfaction and quality outcomes. In order to keep my prepared comments short, during Q&A, I will be more than happy to get into some of the strategies and tactics we have deployed last year and in the first half of this year that are yielding these positive results in a pressured labor market. Before I get into organic growth, I want to briefly discuss our recently announced strategic partnership with SCP Health to jointly develop and deliver an expanded service offering of advanced clinical care services in the home. This innovative clinician-led proprietary model will elevate in-home care and deliver higher acuity care in the home by harnessing the combined talent and experience of partner physicians with our nurses, therapists, and physician extenders, as well as our industry-leading in-home patient care, proprietary data analytics capabilities, clinical modeling, and technologies. As we roll out this expanded service offering later this year, we have the near-term opportunity to capture share where we overlap in 70 hospitals where we have joint ventures and in 109 hospitals where we already have a home health presence. I would also stress that this is not an exclusive arrangement. While we have a lot of runway ahead of us with this partnership, we can just as easily work with other ED and hospitalists that operate in hospitals outside of SCP's footprint. It is safe to assume that in addition to the number of inbound calls we've received from existing and potential hospital partners since the announcement, that we will be doing the same for other providers across the country that operate within our other 365 joint venture hospitals. Now, turning to inorganic growth drivers, at the time of our last call, we had completed or announced a total of $18.1 million in acquired annual revenue for 2021. Since that time, we're now up to 161.7 million in acquired annual revenue announced or completed. Based on the pace of transactions to date and the size of our pipeline, which continues to remain mostly exclusive, we have more than doubled our full year target for the year end, which will have a benefit to 2021, but the biggest impact will be in 2022 with the incremental EBITDA contribution in the range of 35 to 50 million that Keith highlighted earlier. These 2021 acquisitions provide a further layer of growth given that we have a track record of significantly increasing the contribution from acquired revenue over the 12 to 18 months following acquisition. While 2021 is shaping up to be a record M&A year for us, we also remain confident in having another strong M&A year in 2022 with an expectation for more JVs and further home health consolidation. Our outlook is as broad as ever with our sequential trends heading in the right direction, our growth levers propelling us forward with organic and inorganic growth, and policy and regulatory tailwinds that are prioritizing in-home care. We have a big second half ahead of us, and we are well positioned to deliver on those opportunities. Bill, I'll turn it over to you to add additional color on our results and on our guidance. Thank you, Josh, and good morning, everyone.

I am pleased to report our second quarter results were in line with our expectations. and consistent with the bridge we originally provided on the Q4 call demonstrating how the first half of the year would play out compared with the second half of the year in terms of our full year guidance. For the second quarter, net service revenue was up 12% year-over-year and 4% sequentially. Adjusted EBITDA increased 27.5% year-over-year and 19.6% sequentially. Adjusted net income increased 32% year-over-year and 16.6% sequentially to $1.62 per diluted share. While revenue was a little lighter than what we had projected, it was spread nominally throughout all our service lines, and therefore we are keeping our 2021 revenue guidance range intact. The earnings and adjusted EBITDA results were on track as well. So sitting here at the halfway point, we are right where we need to be for 2021. Consistent with past practice, I will refer I want to refer you to our earnings release and supplemental deck for the detailed commentary on our results. I want to spend my time this morning on the key metrics and trends supporting our underlying strong performance and growth initiatives, the factors behind our 2021 full-year guidance, and then close with our recent announcement on a new expanded credit facility and what that means for our growth trajectory. I would first call your attention to page 17 in the supplemental deck where we've broken out the key revenue factors for our home health, hospice, and home and community-based service segments. Our home health segment delivered strong results, with revenue up 16.7% year-over-year and up 6.1% sequentially, with an EBITDA margin of 15.2%, up 220 basis points on both a year-over-year and sequential basis. This impressive performance was driven by double-digit admission and census growth along with a year-over-year increase in revenue per Medicare episode of 4.6% and a sequential revenue per Medicare episode increase of 1.3%. The revenue rate increases were driven by institutional admits up on elective procedure recovery, a looper percentage on PDGM episodes declining, and our case mix improving. The industry-wide hospice challenges are well documented. who we are encouraged by how well our hospice business stood up in the second quarter, as our exposure to senior living centers is modest, with only 8 to 9 percent of referrals coming from this channel. Hospice segment revenues increased 1.7 percent sequentially, while our EBITDA margin of 11.1 percent was up 60 basis points versus the prior quarter, and in line with our guide heading into the quarter. With the improvements in operational drivers discussed by Josh, we remain confident that our hospice segment can achieve sustained EBITDA margins of 13% to 15% by the fourth quarter of this year. The personal care business continues to face headwinds around the well-documented staffing challenges present during the public health emergency. Our billable hours were down 2.3% versus Q2 of 2020, and were down 1.2% sequentially from last quarter. Demand remains very robust, and personal care is an important component of the care we deliver. We are working several initiatives to increase labor supply and capture unmet demand, and the Biden administration and Congress are actively supporting this valued service. But the cumulative effect of stimulus checks and unemployment assistance is a tough headwind right now. I would be remiss if I did not point out how well our service lines are managing the labor and cost pressures that are prevalent across the healthcare sector. On a sequential basis, all service lines demonstrate a strong cost control management, keeping cost per day, cost per visit, and cost per billable hour trends either flat or in line with annualized pre-COVID merit-like increases. As mentioned by Josh, the company has invested intently on increasing and innovating around our recruiting efforts, which has resulted in record numbers of new hires meaningful net employee growth, and stabilizing costs. We will remain extremely focused and committed to this initiative to ensure our growth prospects are supported by the best talent in the industry. While COVID-19 prevalence lessened in the second quarter, we are constantly reminded that the presence and impact of this virus has certainly not gone away. COVID-related spend in the second quarter decreased to $10.8 million compared with 12 million in the first quarter. We noted last quarter we would revisit our COVID spend based on what we saw in the second quarter, which coupled with early indications of a possible COVID resurgence driven by the Delta variant, we are now expecting we will incur 30 to 35 million in COVID related expenditures in 2021. Turning to the full year guidance outlined in our earnings release, the only adjustment we've made is to our range of adjusted earnings. We have raised our adjusted EPS range to 630 to 650 per share, up from 620 to 640, due to better visibility into our effective tax rate and depreciation. At the midpoint, these ranges reflect 8.6% revenue growth, 27.7% adjusted EPS growth, and 23.6% adjusted EBITDA growth, less non-controlling interest. Our core assumptions remain largely consistent with our previous 2021 guidance assumptions, with the only exception being that we are adjusting our near-term hospice organic growth rate down to the 4% to 6% range versus 8% to 10% previously, which is being fully offset by the inclusion in our guidance of two hospice acquisitions that closed on July 1st, Casa de la Luz and Heart and Home. We are keeping a close eye on the recent COVID surge driven by the Delta variant, but be assured we are amply experienced and fully prepared to deal with this virus should it end up being a sustained resurgence. Lastly, we are very proud of our balance sheet. We've worked hard to keep our leverage low and our powder dry for the accelerated inorganic growth we've been projecting. With that growth now upon us, I would refer you to our 8K filed earlier this week on an expanded credit facility that increased our revolver from $500 million to $800 million with a 25 basis point improvement in borrowing costs and an accordion feature that increases our borrowing capacity to $1.3 billion, nearly double our current borrowing capacity of $700 million. On page 38 of the supplemental, you will see that we have total liquidity of $1.1 billion and that's after paying back all 93.3 million of the provider relief funds and CMS recouping approximately 88 million of Medicare advance payments through July 31st. Our day sales outstanding decreased to 55 days in Q1, down from 57 days sequentially, and down from 61 days in the second quarter of 2020, driven by strong cash collections in the quarter. Adjusted free cash flow year-to-date June is 63.8 million, up 44 million versus last year's comparable year-to-date adjusted free cash flow. The free cash flow improvement is driven by growth in our core service lines, strong underlying business fundamentals, and lower capital spending. As we look ahead to the balance of the year, we're in a great place with our balance sheet to support the many organic and inorganic growth opportunities we are pursuing. We can't look past the strength as a true competitive advantage and how it frees us up to execute on an historic level of M&A activity and to take advantage of the tremendous tailwinds behind us on the business, legislative, and regulatory fronts. That concludes our prepared remarks. Operator, we are ready to open the floor for questions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Please limit yourself to one question and one follow-up. If you have further questions, please re-enter the question queue. The first question comes from Justin Bowers of Deutsche Bank. Please go ahead.

Hey, good morning, everyone. First, really appreciate the continuously increasing disclosures and transparency. You give us a lot to work with. one just one kind of a strategy slash dc question for for keith and josh um in terms of the secp partnership can you um can you give us a sense of kind of what the receptivity has been from from some of your partners and then you know longer term where do you think where do you think this business can go and kind of how are you thinking about market sizing just acknowledging that it's still early days um And then secondarily, kind of with the Choose Home legislation, you know, how does that kind of impact your thinking on the size of the addressable market for kind of the SEC partnership?

I'll go first. Thanks, Justin. So, with regard to the SEP, let's start there. Just one minute on that. I don't think we've had the chance to say this, but Dr. Kip Schumacher, the S in SCP stands for Schumacher. The company was originally Schumacher Group. He was an emergency room physician, ran the emergency room at the hospital that was LAC's first joint venture hospital in 1998. In fact, At one point, Dr. Schumacher was going to be an original investor with my wife, Ginger, and what became LHC Group. Just all that to say our history with them goes way back. Dr. Schumacher was a medical director for LHC for quite some time. With that, we understand that we need strong physician support to take higher acuity patients into the home. And Schumacher now has developed quite a robust telemedicine program with on-demand physicians that can support our nurses 24-7. So that's a key component. The receptivities so far from our hospital partners, I could say has been overwhelming, I really expected it to be overwhelmingly positive because we were doing so much extroversion work. This was just really dialing up in acuity from the work we were already doing. We've presented to four of our major partners so far, and four for four want to move forward with the program. We're going to develop the first rounds of these advanced programs and those four strong partnership hospitals, and then we'll learn from that and begin to roll the program out further after that. I think Choose Home connects to that in a very natural way. These are things that we're going to have to do under Choose Home anyway. The advanced care model will allow us to take even higher acuity patients than Chute and Holm is probably the best way to say it. What was the other part of the question? Or did I just cover that, Josh?

Yeah, SCP and Chute and Holm. Justin, maybe the one thing I would, a couple things to add on the advanced clinical care services model. You know, I know Keith mentioned how we've been doing this, you know, for a number of years. So this isn't new, but, you know, this continued progression and momentum into this higher acuity in the home service model, you know, is picking up so much momentum. But the one thing that, you know, has proven for years for us, and I would think, Keith, even in these four conversations we're having with our JV partners, is that It's not a cookie-cutter model. You can't create an approach and then go deploy it all over everywhere. You've got to work very closely with the clinical departments and the CMO, the CNOs of those health systems and make a customized program that meets their needs. Because when you've seen one, you've seen one. And, you know, you really have to work individually with them. So we've put together a team led by our CMO and, you know, a lot of members on our clinical team that are working with these hospital partners. But it's not going to be a one-size-fits-all program.

It's all health care. It's like some things never change.

Got it. And then just a quick follow-up. Can you... can you just help us understand kind of the cadence through the rest of the year, the bridge from, from first half to second half? Like what are the, what are the moving parts? Um, and, and anything to call out maybe quarter to quarter.

Yeah, Justin, this is Dale. Thanks. Um, Here's how I would guide you here as we look at really, as mentioned in the prepared remarks, really the one highlight is around our hospice business where we've adjusted our organic growth rate, but we're completely offsetting that with our new acquisitions, Casa de la Luz and Heart and Home that closed on 7-1. So the way I would look at, the way we see the second half of the year playing out from a Q3 perspective, we see a revenue range in the 580 to 590 million range and EBITDA in the 80 to 85 million range. And as a reminder, in 3Q, we have our estimated MSSP payment of about 10 million in that guide. And then in Q4, I would look at a revenue range of 575 to 585 And then EBITDA range is 75 to 80. That gets you right to the back to the midpoints of our full year guide, given the first half results.

Got it. Thank you. So, it looks like Home Health, another kind of sequential step up, a similar magnitude that we saw in from 1Q to 2Q. Okay. Thanks so much. I'll hop back in queue.

Great. Thanks, Justin.

The next question comes from Brian of Jefferies. Please go ahead.

Hey, good morning, guys. Josh, you mentioned in your prepared remarks something about addressing questions on labor. So maybe let's hit that topic first. What do you see in the labor market? And we obviously track what the hospitals and the staffers are saying. So just curious what you're seeing and how you're addressing that issue.

Yeah, Brian, good morning. As is getting so much, you know, attention and conversation throughout this whole earnings season and really for the past few quarters, you know, the pressured labor market is real. And, you know, across the country, different markets, you know, are feeling more pressures than others. But, you know, as Pete said earlier and as we often say, you know, healthcare is local and so, you know, are kind of the pressures in the labor market. I want to start by just kind of focusing first on the retention side, and then I'll pivot to the recruiting side. From a retention standpoint, which is really our best recruiting strategy, right, Brian, is retaining our dedicated and highly qualified staff to begin with. You know, I've talked directly to a lot of our recruiters and, you know, asked them why do people choose to either join or stay at LHC Group. And, you know, directly from them, you know, it's a small company feel, you know, with big company resources. You know, we're a family, a comprehensive benefits and competitive pay package, you know, flexible variable scheduling, flexible pay structure, what we've invested in education, intuition, reimbursement, our online continuing education program. So from the From the bottom up, the feedback we receive all the way through all of our talent acquisition is that we are doing so many things that differentiate us to retain our staff. I'll give you some specificity, Brian, on benefits. So, I mean, first and foremost, you got to be competitive in your pay, right? But from a benefits perspective, you know, we do market studies every year to ensure that we're not only offering a comprehensive package, but that we are very competitive and leading our peer group in our offerings. Under our PPO plan, and when you really break it down into the two categories that include more than 60% of our workforce, we are at 30% below our peer group in the premiums that are having to be covered by the employee. So for an employee only, that's about $2,000, and for employee children, that's about $4,000 a year. So we've really invested a lot in them from that standpoint. We've also rolled out some formal education reimbursement programs, education discounts. You know about our program with University of Louisiana that we've talked about. And over the past year, we've really enhanced our employee assistance program due to all the stress and the additional support needs throughout COVID. So I would first start with just retention. That has yielded continuing to have low vacancy rates for us in the kind of turnover area. And then when you think about hiring, I said in my prepared remarks, we've had three consecutive strong quarters there, but we've invested in that too over the last year. Our headcount for our recruiters has gone from 33 Q2 of last year up to 53 as of today. So we've had a 61% increase in the headcount that we've dedicated to talent acquisition. And then, you know, some of the specific programs that we rolled out last year when we saw this pressure mounting have really, you know, bore some fruit, Brian. I mean, we put out a new employee referral program first quarter of this year, and we've already hired over 630 employees year to date with another 450 in queue through that program. We've enhanced our LHC alumni I'll call it the alumni return to home program to get former LHC family members to come back. And last month alone, we hired 75 of those, which was more than a 60% increase in that strategy. And I could go on with some other pieces, but definitely want to leave more time for other topics. But I do think, Brian, to put a fine point on it, we have invested in our people for, you know, over 20 years. And that has been the bedrock of who we've been, but it's not just lip service. We do it through benefits. We do it through programs. Um, and we, you know, put a lot of effort in this area and real proud of the team. Um, uh, I guess I would end with that, uh, extremely proud of, you know, from our chief administrative officer and all of our home office support team members and our division presidents and all of our leaders throughout the field. recruiting and retention is on everybody, and they're doing a great job.

No, I appreciate that, Collier, Josh. I guess my second question, as I think about guidance, right, I mean, you're maintaining guidance here, and I was looking back to the original assumptions in the guide on ADC, and obviously, you know, you guys fell a little bit below that, so is it right to think that acquisitions are coming in above original plan, and that's what's plugging the hole there, and As I think about your guidance for the year, I think you talked about $35 to $50 million of EBITDA in 2022 contribution from the target, $300 to $500 million this year. So what is assumed in terms of unannounced acquisitions to get to the guidance number? Just any color on that, on how we're plugging some of the holes in organic and getting to the guidance range.

Yeah, Brian, this is Josh. I'll start and then I'll hand it over to Dale to kind of walk through the impact on guidance. So, I mean, I think you hit the nail on the head from the hospice standpoint. The real puts and takes there are, you know, we've got the Casa de la Luz and the Heart and Home that Dale mentioned. But I wouldn't say that they're performing, you know, at a different level than expected. But when you take the revenue that they're going to bring in from their point of closing throughout the rest of the year, we have included those in the guide because, as you know, our practice is to include once we've closed, not once we've announced. So, you know, Heart of Hospice, for example, is on the board as an announced deal, but it's not included. So that would be more upside for the back half of the year once that closes. So you do have some, you know, revenue positive offsets from the acquisitions that's helping some of that census that you mentioned as well as in hospice. I'd like to mention the census piece on home health as well. When we spoke back at the beginning of May, we were really feeling good about where the census levels were at that time, and we hadn't started to see the seasonality occur yet. But I'll tell you, you know, back half of May, really the second half of May, we saw kind of the typical, I would say, home health seasonality. And then June was down like it has been in, I'll say, 2018 and 2019. We'll ignore 2020 because that's a weird comp for these metrics. But seasonality kind of happened in the back of May and June, which brought the home health census down. But I'm pleased that July is a little bit better than those two previous seasonal norms of 18 and 19. And we're back north of 86,000 as of yesterday in home health census. Dale?

Yeah, I mean, I think, Brian, I think Josh, you know, kind of hit the highlights there. But really, I think what our focus is on is really, you know, the main change in guidance that's offset each other is really around that hospice space where, you know, year to date, first half of the year, organic growth is at about 4.4%. And so, you know, that's where we right now feel adjusting our organic growth rate back to the 4.6 range on that. but being fully made up with the two closed deals that have come in. So that's really where we're at. And, you know, again, we feel very good. And obviously our guide will change as we move forward in closed deals.

Awesome. Thank you, guys. Thanks, ma'am.

The next question comes from Matt LaRue of William Blair. Please go ahead.

Hey, good morning, everyone. Just wanted to ask, you mentioned that sort of the revenue being across the board, a little light sort of in each category. Just curious on home health and hospice, you know, what you think the key drivers were there. Josh, you just mentioned some seasonality. You know, generally speaking, it seemed like Q2 was a pretty good operating environment. Others have highlighted things like turnover and staffing. Sounds like that wasn't the case for you, but maybe there's anything you could point us to to help us out there.

Sure. Thanks, Matt. And offline, I'll say more to you about this, but hopefully everything's going good with that new baby girl of yours. I think she's probably about six months old now. You're spot on.

Thank you, Josh.

Okay. I thought that was about right. So for home health, it really is, you know, seasonality. So I won't restate any of that. On the hospice side, and you see where we've pulled down kind of the annual expectation there as well, it's not as much around the staffing and the recruiting issues there as it is just some of the industry, you know, specific headwinds on, you know, SNFs, IRFs, ALFs. I think Dale mentioned earlier kind of the percentage of our admissions there. But I want to, you know, hit maybe some of the positives for hospice, because I think our team has done a great job of really setting itself apart and differentiating us in hospice performance. We're not quite where we thought we were going to be, but we're still in a very strong position as we head into the back half, as evidenced by those length of stay numbers I gave you. Part of where, you know, the miss is for the past few months was that length of stay was still a little bit sub-80. Now that that has normalized, and that's really attributable to getting more community referrals. As the SNFs and ALs have not, you know, rebounded yet in their capacity and occupancy levels, you know, historically that would be around, you know, 11%, 12% of our hospice referral volume, and it's now running between, you know, 7.5% and 8%. for us. Fortunately, that's not a big portion of our volume. We have a very different hospice strategy than maybe some others, and we don't have as much risk there. But our teams have done a great job of offsetting that and going out into the community, which is helping to bolster some of those length of stay numbers. And then Matt also highlighted in my prepared remarks That admit to discharge ratio, that's a big deal. So as your length of stay is already improving, if your admit to discharge ratio is now back to positive, we should start seeing census, you know, grow at a better clip. I'm incredibly pleased that it's growing, and we continue to see hospice census growth, even with all those dynamics. But I think we, you know, we could start seeing it grow even better.

Okay, thanks. And then... maybe for Keith or even Bruce that, you know, I think we've heard some mixed opinions about the likelihood of passage for choose home. And it sounds like you're a bit more positive on that happening. So maybe just give us a sense for how you're kind of handicapping that, maybe what most likely vehicle would be. And then if it is passed, you know, how quickly could it become meaningful for LHC? Obviously you've begun to put sort of the clinical capabilities in place, both internally and with, but just maybe a little more color on how you see that playing out would be great.

Yeah, sure. So I'll just, the reason that we're so bullish on the probability of this becoming law is, let's start with the sponsors and the Senate. So we have five of the eight sponsors, are on the Senate Finance Committee. And, you know, Debbie Stabenow and Todd Young, you know, being the two leads. You know, that combined with consumer preference, especially post the COVID experience, you know, pandemic, I think we couldn't be better positioned for inclusion either in in reconciliation or in a year-end package. I spent quite a bit of time in Washington over the last month. And so what I'm saying to you is not hearsay. It's from my personal visits with key members in both the House and the Senate. And I've got somewhat of a feel for this. I've been doing this work on the Hill for nearly 30 years. I know when they're being polite to you, but really mean no when you really have something that they believe in. So I do think it's highly likely. I mean, there are no guarantees anything can happen. So let's assume that it does happen. How fast could it become meaningful? I think it could become meaningful very fast because there are a lot of home health providers across the country that are capable of providing that SNF-level care. When we're dialing up now to a higher acuity level, it's hospital at home. We don't like to use that term because it implies that we can do things that hospitals can do. But on the lower 20% to 30% acuity of hospital patients, that's where we're focusing at with advanced care at home. But SNF at home, a lot of home health providers are doing that already, especially when you're talking about the lowest 20% to 30% on an acuity scale of SNF patients.

Okay. Thanks, Keith.

The next question comes from Joanna of Bank of America. Please go ahead.

Good morning. Thanks so much for taking the questions, Kate, here. So I guess on the M&A target, clearly you've seen a lot of I guess these coming your way, it seems like very confident in being able to close those. So can you talk about, you know, any, I guess, competition you see, any pressure on multiples and how we should think about, you know, that part of the equation here?

Let me start with that. Thanks for the question, Joanna. So, you know, I think maybe, Josh, I'll throw this to you in a minute, I think it's important to understand that we only move forward to the next level with probably maybe a third or less of the opportunities that come into our pipeline. For a long time, since before LAC was public, one of our first board members was a private equity investor. And we built a model of efficiently reviewing opportunities and then culling them, for lack of a better term. So that department exists in LAC, and we sift through a lot of opportunities that we don't ever go to the next level with. But then when we do, Josh, maybe you can speak to the rigor and analysis.

Yeah, no, thanks, Keith. And good morning, Joanna. First, to Keith's point, to color in some of the details around that, Year to date already in 2021, we've passed on 43 deals. And we've, you know, got nine, you know, that we've closed on. So that's, you know, roughly, you know, maybe a quarter or so. Since 2018, we've, you know, reviewed at various different stages of being either in a process or, you know, looking at a transaction even through diligence. And we've passed on 361 deals. So our, you know, M&A department, which across the board has been trained with kind of the foundation that Keith just described on how to look at deals, we've got a process where, you know, we look at a lot so that the ones we do meet our standards. And we've talked before, you know, those standards, Joanne, about, you know, we're not going to just go out and buy earnings or EPS. We're going to have a transaction that has that growth trajectory and that growth platform For hospice, we're going to ensure that it has a very diversified portfolio of referral sources so that it's not all tied up into one system or tied up into all SNFs or what have you. So even some of the larger and medium-sized deals that have closed, we've looked at a lot of them. But, you know, are very disciplined in the ones that we do and are excited not only about the ones that we've announced, but some of these that are in exclusive discussions, you know, are definitely going to meet that profile. And if you go back to, you know, even our IR deck that's out there or I think it was Q4 of last year when we first put the slide out that showed the incremental growth on acquired revenue from, you know, 17 to 19 deals. You know, that's why we are so, you know, excited about this acceleration, because the deals we do, we know they're not just going to contribute like we're saying for next year, but there's going to be even more growth potential and contribution out of those, you know, 2023 and forward. So really pleased with our M&A strategy and how we're executing it.

All right, it makes sense. And I guess on the... related somehow, but on the partnership with the SCP, you know, are there any investments or any kind of cost outlays, you know, associated with, you know, I guess, launching these programs, actually? So can you kind of frame any anything around that partnership, whether there's any, you know, drug, I guess, initially, and when do you actually expect to see you know, these programs materializing and kind of contributing to revenues, you know, and also lastly on that piece of, I know obviously this is very early in the process, but, you know, just kind of big picture, long-term kind of question in terms of, you know, target margin on something like that. If you stand up these programs, should we think about this kind of a home health style or is it a different kind of profile for something like that, like this kind of program? Thank you.

I'll take the first part of that at least. With regard to how quickly we can go to market with these, I think we'll have our first two stood up and operating by the end of 2021. I think, you know, there'll be development. It won't be optimized, but we're actively and we're in the planning process with those two now.

So what was the, how much investment?

Yeah, any investments or any costs, incremental costs that you, you know, expect. And I guess if you do them, you know, are those also included in the guidance?

Yeah, so that's a really great question. One of the benefits of this model is that we approach it with a low overhead model, like very low overhead model, because between SCP and LHC, we have all of the components necessary to stand up and operate without having to hire separate staff We have the boots on the ground. So what we have to do is coordinate the things we don't have, the meals, the DME, the telemonitoring we already have. We already do that in those markets. So we're able to go to hospital partners with a no-management fee model because we don't have overhead to cover. So we create a partnership, and we share in the gain that we create. So the investment is... the investment is zero. So what we did with SCP, we agreed to capitalize with $4 million just to put some capital in, but we really aren't drawing on that at all. I'm sure we will, and what we'll use that for is we'll have to hire some people in local markets, and there are consulting fees that we will use for different consultants that will advise us on different aspects of the model. But there is no other investment.

And I would just add, Joe, and this is Dale, that the investment will scale with the programs, right? That's the variability. They'll scale as the programs go.

Right, but in terms of sizing it, kind of when you look out, obviously, this year sounds like it's going to be the minimum, excuse me, in terms of the size. But, you know, what's your kind of target in terms of how much, you know, incremental, I guess, revenue, or are you going to view it as kind of just kind of your normal growth in your business? And then in terms of, you know, margins, target margins?

I think we'll have more color on that by next quarter. You know, we can certainly calculate a revenue and what we think margin will be per patient, but what we don't know is how many patients the individual hospitals are going to want to put in the program. And being a little more specific, I mean, some hospitals want to focus on the lower 10% acuity patients in their hospital, and those are – there's less – opportunity for cost savings there so you know those will be lower return but then others and you know Ochsner again is a good example so their their interest is in moving the lowest 30% acuity patients to the home so there you have higher acuity patients and a greater opportunity to generate savings and we don't know yet how much volume and what those patients will look like until we analyze all their data. And we're in the process of doing that now. Step one in standing up a program is to collect data and then hear from the partner of what they want and then to score that out. That's what we're doing now.

Yeah, that's a really great call. I appreciate it. Yeah, it's early, but I figured I'd just I just ask whether there's anything you can talk about now, but I appreciate the color. And if I may just squeeze that at the very last one, in terms of home health margins, like you mentioned, very strong in this quarter. You know, so I guess there's a question of how sustainable, you know, when we think about next year, are those margins obviously the sequestration cut coming back and whatnot, but kind of can you frame for us how we should think about this, you know, in out years. Thank you.

Yeah, Joanna, this is Dale. I mean, I think we've been very consistent in our messaging there that we've stood behind our home health business as being a 15% EBITDA margin business. We continue to think that's the appropriate EBITDA margin. And as you look forward with the sequestration, we believe our organic growth as well as inorganic growth opportunities, you know, will allow us to replace not just the revenue, but also continue to improve on the margins as we scale the business bigger. So we feel very comfortable with that 15% EBITDA level.

Yeah, absolutely, Dale. And joining us, Josh, I mean, as you know, the home health rule that came out, you know, we've got, you know, a bump in reimbursement that will also help. I think it's like 1.6, 1.7% that will help offset the sequestration going away. So when you combine reimbursement lift, some of the things that Dale and the team are leading on, everything we talked about with more non-Medicare episodic and just rate improvements there, plus growth. I couldn't agree more, Dale. Very confident in the sustainability.

The next question comes from AJ Rice of Credit Suisse. Please go ahead.

Hi, everybody. Maybe first, You guys have now had several, since the back half of last year, very good growth in your new physician referral sources. I wonder, is there some way to now have perspective on that pace of growth? I think it's 33% year to year, or 26% rather, year to year in the current quarter. How does that mature over time? Do you see the benefit of that new referral source? right away? Does the amount of referrals you're getting from those sources improve over some period of time, or do they tend to be sticky and stay with you once they are a new referral source?

Yeah, AJ, good morning. This is Josh. I would say, you know, It does take some time. So the first thing is, you know, getting that initial kind of referral relationship. And that's what's got our, you know, growth team and our growth leaders so excited is you've got, you know, this much broader group of physicians that are now referring into home health. And what we've seen over the course of the pandemic is you've got some that are now referring into the home that may have been referring somewhere else previously. And then you've got other instances where it may be a new referral source to us, but they've been a good supporter of home health already and we're just taking market share. So you've got both of those dynamics in play. And under either scenario, it may be the first one takes a little bit longer for that referral source to have more volume. And the second one, it may take a little bit longer to get stickier, to use your phrase. But, you know, I think our team is doing a really good job of, you know, relationship building and frankly, you know, continuing to improve our quality scores like, you know, Keith mentioned in his prepared remarks. at the end of the day, that's going to be the differentiator in making those referral partners sticky. As far as the sustainability of 30%, it's too early to call on how long that trend would last and how much of that is impacted by the pandemic and with this latest surge, when's the public health emergency over and what does that normalize down to? But, you know, our chore is to make sure that we, you know, continue to deliver high-quality services and support to those physicians and gain more of their trust in business.

Yeah, no, I was assuming that 30% growth wasn't something you continue to see quarter in, quarter out. But I was more concerned, do you think these are temporary where they may revert to other rural nations? It sounds like you don't think that's the case.

We don't at all. We get real good feedback to the contrary there.

Right. The other thing I get asked quite a bit about is your visits per episode in home health are, you know, probably industry-leading when you think about it from the perspective of positive impact on your margin. You've been in sort of that 12.6, 12.7 range for two quarters now. Do you think – that's a sustainable level? Is there something about the current environment that makes that lower than you think it'll ultimately settle out? But what's your latest perspective on that?

Yeah, so based on the patients that we have today, we most definitely think it's a sustainable level. And not to rehash all the work that our clinical leadership team put into rolling out PDGM, But we had great confidence in what those VPE would look like based on the primary, secondary diagnosis and all the comorbidities and whatnot. I would always want to highlight this, AJ, and extremely proud of our continued improvement in our quality. When you see that we've gone from 4.23 stars to 4.39 stars.

Hello, I've reconnected the speaker lines. Please go ahead.

Great. Thank you, operator. And for all that are still hanging in there with us or those that will be reading the transcript later, sincere apologies for the technical mishap that just occurred on the operator side of things. But we are going to try and jump back in and resume. I know, Frank, you are in queue for the next question. Before we go to your question, I just wanted to wrap up quickly now on AJ's question. So I think I was in the middle of describing kind of how proud we are and pleased with the continued improvement in our quality scores going from the 4.23 to the 4.39 in the most recent SHIP data, which gives even more kind of confidence in the execution of our, you know, clinical care pathways and modeling under PDGM as we've continued to see improvement in the AFAM agencies that has continued to help lift our, you know, combined company. The last thing I'll say about from a sustainability of VPE, we started to see a little bit of uptick back in some ortho referrals, whether that's, you know, from elective procedures or otherwise. And as you see more ortho, you may have a little bit more visits per episode, but that would come with corresponding increase in case mix as well. So, Operator, I'll hand it back over for Frank.

The next question comes from Frank Morgan of RBC Capital Markets. Please go ahead.

Sure. Thank you. I guess I wanted to go back to the acquired revenue assumptions. Those are dramatically increasing. Can you characterize the type of revenue you're acquiring? I mean, is it hospice? Is it home health care? Is it a mix? Any color around the characteristics of where this, which side of the business this will come from?

Yeah, Frank, this is Josh. So, you know, we said we had a pipeline a little over 400 million and in exclusivity, you know, a little over 300 million or so in our current pipeline. Of that exclusive bucket, it's about 180, 190 of hospice and about 120 or so of home health. So that kind of gives you how those split out. And then of the non-exclusive deals, that's another 100 million or so, it's right down 50-50 between home health and hospice. So we've seen a big ramp this year in our hospice activity, but we're now starting to see the pipeline rebalance a little bit with more home health coming through.

And this is, we're talking about the acquired revenue that you expect to add now under these new assumptions. That's the mix for that. Correct. Correct. Okay. You know, I guess I also wanted to ask about any kind of disruptions you may have seen. You know, your neighbor has talked about, you know, business development staffing issues. Did you experience any of those kind of difficulties, either loss of staff or changes in staffing levels related to business development? Would that have in any way been a reason for the softness, or do you attribute it more purely to just these shifting and referral patterns?

Yeah, definitely more of the latter, Frank. We've not experienced the turnover issues in the account executive BD role, especially where they may be leaving us for whatever reason. We've had turnover in some of those seats, but I would say it's been healthy turnover just from lack of production and folks that are no longer with us for those reasons. But when I step back and, you know, meet with our, you know, growth leadership team and look, the production per account executive is at an all-time high for us. So we've had some healthy turnover, but it has not in any way affected our numbers. And now, you know, we're netting positive on AE additions throughout last quarter and even early signs this quarter. So real good, feel good about feet on the street.

Let me just chime in on that, Joshua. So I agree with Josh just hit the nail on the head. Frank, I think, you know, this is where culture pays off. You know, to borrow Drucker's term, culture eats strategy for breakfast. I mean, you know, we've been investing in culture for about three decades. And what we hear from our people is that that now matters more than ever. And it's paid benefits and all those things. But it's also... operating an organization that's flat enough where everybody feels like they have a seat at the table and they heard. That's very important to this generation of workers that are on the front lines of healthcare now. So I appreciate the question. I think Josh, you just hit it on the head.

And maybe just one last one. Obviously the call out for COVID-related expenses, bumping that number up some more. Do you... do you have a sense that maybe this is just going to be a recurring part of business at some point, and would you care to give a stab at, if you agree with that, what do you say, what would you think would be sort of the recurring level of COVID-related expenses? I mean, I know some of this is, you know, PPE, you know, testing and whatnot, but Do you think COVID might become recurring, and if so, would you pick a number out of what that expense might be? Thanks.

Yeah, Frank, this is Dale. Here's how I think we view it is, first of all, just to go back to our stats, clearly, you know, we had 12 million of COVID-related spend in Q1, 10.8 million in Q2, so we are coming down. If you look at our guide for the balance of the year of 30 to 35 total year, that would assume that we're somewhere in the neighborhood of 7 to 12 million for the balance of the year. So we clearly see it coming down. It's really a hard thing to predict because right now when you look at the resurgence, is it a sustained or not sustained? But we believe that this will continue on a downward trajectory and get towards a you know, a nominal number, you know, in the future. And so that's our perspective on it right now. It's a very hard thing to predict because it's hard to understand what this virus is going to do. But we continue to expect it to come down. And right now, really, our COVID spend, as you look at it go forward, is really limited toward hazard pay on our clinicians that are taken care of.

you know, COVID-positive or suspected patients. Thank you. Thanks, Frank.

The next question comes from Raj Kumar of Stevens. Please go ahead.

Hi, everyone. Actually, it's Scott Fidel just here on Raj's line. Had some technical difficulties. First question, just interested just in terms of looking at the annualized revenue target that you provided. Any sense, would there be a corresponding range of the level of capital that you're budgeting, expecting to deploy around that targeted acquired revenue?

So, yeah, so, Scott, you're referring to our $350 to $500 million acquired revenue, correct? That's right, Joe. Thanks. Yeah, so, I mean, the way we've modeled this out is, and as we mentioned in the opening comments, we have We have closed on an extended credit facility which gives us borrowing capacity up to 1.3 billion as we want plenty of dry powder available not just for this year but into the future. Our modeling right now as we look at if we complete all these deals continues to show a balanced deployment of debt and equity if you will. So our model shows about 650 million of debt that we would deploy this year in support of the $350 to $500 million. With the balance of that, plus or minus, right, the balance of that depending on – we have an equity shelf registration out there as well. So our goal is to continue to keep our net leverage ratio in the, you know, the two, two and a half range.

So that's how we've modeled it.

Okay, that's helpful. And then just as my follow-up question, I know it's early here for giving us, you know, sort of formal guidance on 2022, but just interested in how we should think about that acquired contribution because it is pretty significant in terms of both the revenue and the EBITDA that you've cataloged in the release today. I know you've talked about aspiring to sort of a mid-teens type adjusted EBITDA growth rate. Should we think about those acquisitions as being sort of the key contributor towards that or additive to that? I mean, clearly there are some headwinds in the business, particularly hospice, for example, that the industry is absorbing this year. So I'm just interested maybe if you could try to just parse out sort of that organic and inorganic. dynamic relative to that longer-term growth target that you've talked about aspiring to. And that's it for me. Thanks.

Yes, Scott. This is Josh. I'll start. It's definitely additive growth. So, if you think about, you know, where our, you know, guide range is on revenue right now, and you throw, you know, an incremental 350 to 500 on top of that, plus organic growth under the different service lines that, you know, we expect each year, even with sequestration, you know, puts and takes and all that. I mean, it is definitely additive and puts us in a position that would have us far exceeding what we would have previously expected for 2022. And then from an EBITDA margin contribution standpoint, you know, if we, you know, are even, you know, between the low and the high end of that 35 to 50 range, that is, accelerated and additive to next year's expectations already. And then that's year one of these acquisitions for the most part, because you can tell we're going to be closing them in the very late part of this year. So that's kind of the level that we expect them to contribute next year in their first year of performance. Where it really starts to ramp up is when those assets also start to grow and the contribution margins improve. If you're seeing a $35 to $50 million off of $350 to $500, obviously that's signaling 10%. We would expect it to, you know, accrete and have better margins, you know, in 2023 and so forth. So glad you asked the question. One of the main reasons we're so bullish about the outlook and next year really kind of taking off for us.

This concludes our question and answer session. I would like to turn the conference back over to Keith Myers for closing remarks.

Okay, well, thank you, everyone. And again, our apologies for the technical difficulties. Thank you for dialing in, and especially those who returned. So I look forward to talking to you next quarter. Thanks for dialing in.

The conference is now concluded. Thank you for attending today's presentation.