The Pennant Group, Inc.

Good day and thank you for standing by. Welcome to the PAN Group 3rd Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, press star 0. I would now like to hand the conference over to your speaker today Mr. Derek Bunker, please go ahead.

Thank you, Chino, and welcome, everyone. Thanks all for joining us today. Here with me today, I have Danny Walker, our CEO, Brent Gersoli, our president, Jen Freeman, our CFO, and John Gochner, our COO. Before we begin, I have a few housekeeping matters. With all the press release and 10Q yesterday, for our third quarter earnings. This announcement is available on the investor relations section of our website at tenantgroup.com. A replay of this call will also be available on our website until 5 p.m. Mountain Time on Friday, December 10th, 2021. We want to remind anyone that may be listening to a replay of this call that all statements are made are as of today, November 9th, 2021, and these statements have not been or will they be updated subsequent to today's call. 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 subsidiaries, collectively referred to as the service center, provide accounting, payroll, HR, IT, legal, risk management, and other services to the other operating subsidiaries through contractual relationships with such subsidiaries. The words pennant, company, we, our, and us refer to the Pennant Group, Inc. and its consolidated subsidiaries. All of our operating subsidiaries in 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, our, and similar terms used today are not meant to imply, nor should it be construed as meaning that the tenant group has direct operating assets, employees, or revenue, or that any of the subsidiaries are operated by the tenant 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. They should not be relied upon to the exclusion of GAAP reports. A gap to non-gap reconciliation is available in yesterday's press release and in our 10Q. With that, I'll turn the call over to Danny Walker, our CEO. Danny.

Thank you, Derek, and welcome, everyone, to our third quarter 2021 earnings call. Thank you for joining us today to discuss our third quarter results and, more importantly, the steps we are methodically taking to return to the healthy growth rate we've achieved over much of our history. These ongoing multifaceted efforts will position us for a stronger 2022. We're grateful for our frontline employees and resources that continue to provide exceptional care to the 23,000 patients and residents we served during the third quarter. Our third quarter results are sobering, given the high expectations we established for ourselves. and have caused us to review our actions to identify missteps we've taken over the past two years as a public company. In general, the demands of completing the spinoff successfully, the high volume of home health and hospice acquisitions, the leadership overhaul of our senior living segment, and the investment of time and resources in early stage new business measures, all when coupled with the unique pressures of the COVID-19 pandemic have diluted our effectiveness. at operating to our standards. Throughout our history, we have gone through periods of substantial growth followed by periods of retrenchment and concerted focus on organic growth. We know that sustainable clinical and financial results are achieved when our investment activity is well calibrated with the health of our current operations and bandwidth of our leaders and resources. We haven't struck this delicate balance well enough over the past 18 months. We are taking immediate actions to, one, ensure that each local team is executing at a high level without distractions. Two, retrench around the core opportunities across both segments. And three, reinforce the core principles of our operating model that have led to our historical success. We believe that these efforts will yield significant results in the short term and ensure long-term health. Now turning first to our home health and hospice segment performance, we continue to produce solid results with segment revenue up 14.6 million or 22.7% and adjusted EBITDA up of 0.05 million or 3.9% both over the prior year quarter. Our third quarter results reflect both the strength of our same store agencies and the challenges of integrating a large number of new acquisitions. The operating environment in the third quarter was impacted by the rise in COVID-19 cases in several of our key markets and the ongoing labor pressures across the platform. For example, in the third quarter, total home health admissions declined 5.7% from the second quarter, nearly a quarter of of which relate to the delay in elective procedures in key markets such as Arizona, Idaho, Utah, and the Dallas-Fort Worth Metroplex, where we've recently acquired home health agencies. Approximately 80% of our decline in our total home health admissions is attributable to agencies acquired over the past 24 months. Our hospice business continued to produce steady results despite similar pressures. related to COVID-19 and our recent acquisitions. Excluding agencies acquired within the past 12 months, our hospice admissions increased 12% in the third quarter over the prior year quarter and average daily census increased 1.4% over the prior year quarter. When we see a spike in COVID-19 cases like we saw in the latter half of the third quarter, it temporarily impacts our ability to admit and increases our cost of services as more and more staff our enter quarantine protocol. As COVID-19 cases normalized in our markets as we exited the third quarter, we are beginning to see traction in our home health business, evidenced by an 8.7% increase in total admissions in October over September. The bedrock of our confidence in continued growth and our long-term health is our relentless focus on providing exceptional clinical care to our patients and residents. We continue to achieve high marks in several quality scores across our home health and hospice segment, with an average home health star rating of 4.23 stars according to CMS and 4.4 stars according to real-time third-party analytics. Our hospice quality composite score continues to trend well at 95% at the end of the third quarter compared to the reported national average of 90%. Our emphasis on clinical outcomes will be increasingly rewarded as the home health value-based purchase model is rolled out nationwide through the expansion of hospice and through the expansion of hospice quality reporting programs Since 2018, 12 of our agencies have participated in the home health value-based purchasing model in Washington, Arizona, and Iowa, and we achieved net positive revenue adjustments each year. Just as we have successfully prepared for and navigated the implementation of the patient-driven groupings model, or PDGM, and prior reimbursement program changes, We look forward to the opportunity presented by the nationwide home health value-based purchasing model and related value-based reimbursement models to demonstrate and be rewarded for the clinical quality of care that our talented teams provide. In our senior living segment, the ongoing effort to support our leaders in executing within our unique operating model continues. The improvement we achieved in the second quarter and believed would continue into the third quarter was disrupted by the sharp rise in COVID-19 cases, particularly in the markets where our senior living communities are concentrated. During the quarter, the spike in COVID-19 cases also amplified the labor pressures we've felt across our senior living communities for most of 2021. There are several levers we are pulling to help address these pressures directly and help offset their impact. And now that we've completed the implementation of our full suite of IT systems, the tools and analytics available are improving our sales and marketing processes, wellness delivery, and labor management. As we build stronger senior living operations, move past the worst of COVID-19, and begin serving a growing addressable senior population, our senior living segment has the potential to be a source of strength for Pennant. As we announced in our press release yesterday, we are providing guidance for the full year of 2022. We anticipate full year revenue in the range of $468 million to $478 million and adjusted earnings per share in the range of $0.75 to $0.82. As we consider the impact that COVID-19 has had on our businesses over the past 18 months, We believe and have assumed in our guidance some ongoing pressure, similar to what we've experienced in 2021. We also believe that the external effects we experienced in the third quarter are more transitory and likely to dissipate as cases normalize. Our guidance assumes accelerated results in our recent acquisitions, more in line with our historical transition rate, continued growth in our home health and hospice same-store agencies, and incremental improvement in our senior living segment. With that, I would just say that our hope remains strong in our long-term value proposition, and we're deeply grateful for the team members in the field and at the service center that are making the important changes that need to take place for us to unlock that value and opportunity for our shareholders. With that, I'll ask Derek to provide an update on our recent investment activity. Derek?