The Pennant Group, Inc.

Thank you for standing by. Welcome to the Pennant Group first quarter 2025 earnings poll. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. I would now like to hand the conference over to your speaker today, Kirk Cheney, Executive Vice President.

Thank you, Josh. Welcome, everyone, and thank you for joining us today. Here with me today, I have Brent Garasoli, our CEO, John Gochner, our President and COO, and Lynette Walden, our CFO. Before we begin, I have a few housekeeping matters. We filed our earnings press release in 10Q yesterday. This announcement is available on the investor relations section of our website at www.pennantgroup.com. A replay of this call will also be available on our website until 5 p.m. Mountain Time on May 6, 2026. We want to remind anyone who may be listening to a replay of this call that all statements are made as of today, May 7, 2025, and these statements will not 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, tenant and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise from new information, future events, changing circumstances, or for any other reason. In addition, the PANIC group incorporated the holding company with no direct operating assets, including employees or revenues. Certain of our independent subsidiaries, collectively referred to as the service center, provide accounting, payroll, human resources, information technology, legal, risk management, and other services to the other operating subsidiaries through contractual relationships with such subsidiaries. The words pennant, company, we, our, and us refer to the Pennant Group, Inc., and its consolidated subsidiaries. All of our operating subsidiaries and the service center are operated by separate independent companies that have their own management, employees, and assets. References herein to the consolidated company and its assets and activities, as well as the use of the terms we, us, our, and similar terms do not imply that the Pennant Group, Inc. has direct operating assets, employees, or revenue, or that any of the subsidiaries are operated by the Pennant Group. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. The GAAP to non-GAAP reconciliation is available in yesterday's press release and is available in our 10Q and 10K. And with that, I will turn the call over to Brent Garasoli, our CEO. Brent?

Thanks, Kirk. Good morning everyone and welcome to our first quarter 2025 earnings call. To begin, I want to recognize all the contributions and efforts of our incredible partners across the Pennant footprint. Always, but especially in periods of dramatic growth, the work our teams do can be demanding. I am so inspired to see our people daily rising to the challenge. We are pleased to report another record-breaking quarter with strong performance across our business, resulting in revenue of $209.8 million, an increase of $52.9 million or 33.7% over the prior year quarter, consolidated adjusted EBITDA of $16.4 million, an increase of $5.1 million or 45.9% over the prior year quarter, and adjusted diluted earnings per share of 27 cents, an increase of 7 cents or 35% over the prior year quarter. Our first quarter success can be attributed to our consistent focus on five key initiatives, leadership development, clinical excellence, employee experience, margin improvement, and growth. As we make progress in each of these areas, flywheel also continues to turn in each of our business segments allowing us to opportunistically add and transition new operations as our existing operations drive strong performance and organic growth this is primarily a product of our innovative operating model and multi-year focus on leadership development and building a robust pipeline of leaders as we've explained before Pennant is a leadership company committed to providing life-changing opportunities for local leaders to achieve C-level performance in their operations and become owners in Pennant. Our local CEOs and other C-level leaders earn this designation by demonstrating true ownership and creating clinical, financial, and cultural value. In the process, they typically generate higher annual earnings than our non-CEO executive directors, along with better clinical and cultural outcomes. Since January of last year, 52 local leaders earned C-level designations in their operations, including 19 local CEOs. In 2025, we are ahead of our year-to-date goals to recruit CEOs in training and elevate clinical leadership through our Clinical Operations Leadership Training Program. By investing in our leaders and continuously recruiting new ones, we position ourselves to be ready when unique and compelling situations arise. For example, in January, we completed the second stage of the Signature Healthcare Transaction, which included several locations across Oregon. At Signature, as in all our transitions, our first focus has been on leadership and culture. Signatures leaders have joined clusters with existing tenant leaders, allowing them to share best practices and peer accountability. Leveraging tenant's locally driven operating model, signatures operations have quickly and successfully integrated, and as a result, the signature transition is ahead of schedule. We have proven countless times over many years that our model works well when applied to single site or tuck-in acquisitions. And the signature experience is proving that it also works well at scale in multi-site and platform acquisitions. What is notable about our recent performance is that we achieved these tremendous results in the midst of adding 36 new operations since January of 2024 across both business segments and most of our markets. Many of these acquisitions are already performing above our initial expectations. Based on our strong performance in Q1, the early progress we're seeing in our recent acquisitions and the continued momentum we're experiencing across our businesses, we would point you to the upper end of our 2025 guidance range. As we continue to monitor our results and navigate economic uncertainties, we will revise guidance as appropriate. Now, I'll turn the call over to John Gochner, our President and COO, to provide more detail on our first quarter operational results. John?

Thanks, Brent. I'm pleased to report strong performance across both operating segments in the first quarter. Our focus on leadership has allowed us to pair robust organic growth with the effective transition of newly acquired operations, leading to exceptional financial and clinical results. Our home health and hospice segment delivered another record-setting quarter. In Q1, segment revenue reached $159.9 million, up 43.4 million, or 37.2%. An adjusted EBITDA rose to 25.1 million, an increase of 7.3 million, or 40.6%, each over the prior year quarter. We also remain steadily focused on improved clinical outcomes and strong cost discipline at the local level, resulting in an adjusted EBITDA margin of 15.8%, a 10 basis point improvement, even as we experience rapid growth and significant acquisition activity. The growth in our hospice programs reflected this momentum. Hospice admissions rose to 3,783, an increase of 22.8%. An average daily census climbed to 3,794, up 28.1% each over the prior year quarter. Organic growth was a key contributor to this improvement as length of stay increased and same-store average daily census rose 10.4%, over the prior year quarter. Among other drivers, these results reflect our ongoing investment in developing geriatric primary care, palliative care, and specialty clinical care programs in several of our communities. These locally-led programs, supported by our provider services resource team, are designed to address critical gaps in local care continuance and ensure that patients receive the right care in the right setting at the right time to improve clinical outcomes and patient satisfaction. In many cases, these provider-driven programs have helped us open new doors and expand referrals across the care continuum. The proposed 2026 hospice rule released last month includes a 2.4% rate increase. Based on our initial modeling, we expect to receive a similar 2.42% upward adjustment, which is consistent with our previously released guidance. Our home health segment continues to be a pillar of strength. Total admissions grew to 18,878, an increase of 4,229, or 28.9%. Medicare admissions rose 19.7%, and Medicare revenue per episode increased by 9.3%, each over the prior year quarter. Strong transitions, including those at Signature and Viewer Home Health, helped drive this outsized growth, along with continued performance at our same-store operations. where we saw admissions increase 12.2%, Medicare admissions increase 5%, and Medicare revenue per episode increase 5.9% each over the prior year quarter. Clinical quality continued to set our home health operations apart, with a CMS-reported average star rating of 4.1, significantly above the industry average of three stars, and a potentially preventable hospitalization rate of just 8.7%, well below the industry average of 10%. Our senior living business continues to gather steam as our flywheel of operational improvement, coupled with opportunistic acquisitions, picks up speed. We continue to methodically expand and deepen our bench of entrepreneurial leaders, and we are seeing progress resulting from these efforts. Senior living segment revenue of 50 million increased by 9.5 million, or 23.6%. over the prior year quarter, adjusted EBITDA of 4.9 million increased by 1.4 million or 40.8%, and segment adjusted EBITDA margin increased to 9.9%, a 120 basis point improvement over the prior year quarter. Over the same period, occupancy was essentially flat as we intentionally focused on capturing high quality revenue, leading revenue per occupied room to increase 11.3% over the prior year quarter. While our senior living performance is solid, we also see significant latent potential that we can unlock as we improve occupancy and margin. Turning to growth, as Brent mentioned, and as we discussed on our prior earnings call, on January 1st, we completed the acquisition of Signature Healthcare, bringing the Oregon operations into our portfolio. As we expected, Signature has been an excellent fit with Pennant. And operationally and clinically, we have made significant progress since acquisition, including completing the transition to our systems and instance of home care home base. This transition was driven by our local Northwest portfolio companies with significant support from our exceptional service center. The early success in retaining leaders, employees, and patients reflects our ability to successfully acquire and transition multi-state, multi-site operations to our unique operating model. Also mentioned on our priorities call, on February 1st, 2025, we announced that we acquired through long-term triple net leases senior living operations in Nampa, Idaho, Kerrville, Texas, and Tomball, Texas. These two are off to a great start. On April 1st, 2025, we announced our acquisition of the Villages at Red Mountain Senior Living in Mesa, Arizona, adding 128 units in this key state. In addition to the operations, tenant purchased the underlying real estate. Red Mountain had underperformed under prior ownership and been placed in the state receivership, allowing us to purchase this relatively new and attractive facility for a favorable price and become a solution for the receiver, the resident, and the local community. This acquisition highlights our ability to navigate unique transitions and unlock significant value in complex circumstances. Finally, on May 1st, 2025, we issued an 8K related to our agreement with UnitedHealth Group and Amedisys to acquire certain assets connected to their planned transaction. This opportunity remains subject to the closing of United and Amedisys' broader transaction and other customary closing conditions. We will disclose additional information related to this transaction as the process unfolds. Beyond the UnitedHealth-Amedisys deal, we continue to evaluate a strong pipeline of acquisition opportunities in both segments. As always, we will approach these opportunities with discipline, pursuing only those we believe we have the leadership capacity and operational strength to support. With that, I'll turn it over to Lynette for a review of the financials. Lynette?

Thank you, John, and good morning, everyone. Detailed financial results for the three months ended March 31st, 2025 are included in our 10Q and press release filed yesterday. Key metrics for the three months ended March 31st, 2025 include 56.7 million drawn on a revolving line of credit with 193.3 million available and 5.2 million in cash on hand at quarter end and a 0.83 times net debt to adjusted EBITDA. The company's cash flows used in operations was 21.2 million, a decrease of operating cash flow of $21.8 million compared to the prior year quarter. This was due to significant acquisitions we made in the first quarter of 2025, which come with elevated accounts receivable due to revenue growth and normal transition-related payment reconciliation processes. In addition, first quarter operating cash flows were impacted by our annual incentive payouts and payroll accrual timing. In short, this swing is a function of acquisitions and accrual timing and not a fundamental change in our longer-term operating cash flow expectation. Cash collections remain strong, as our day of sales outstanding have improved year-over-year and over the sequential quarter. We expect our 2025 cash flows from operations to be between $35 and $45 million. We have sufficient available funds on our revolver to execute on the UnitedHealth-Amedisys transaction and remain well within our covenants. With our strong operating results in Q1, we are trending towards the upper end of our 2025 guidance. As a reminder, our guidance includes revenue of $800 to $865 million, adjusted EBITDA of $63.1 to $68.2 million, and adjusted EPS of $1.03 to $1.11. I would now like to spotlight a few of our leaders in our organization who earned the Flag Award in 2024. which is Pennant's most prestigious award to recognize an outstanding achievement in all facets of an operation. Their stories demonstrate the remarkable progress that can occur when local leaders build strong culture and develop high-performing teams of C-level leaders in their businesses. At Simbi Home Health and Hospice in Idaho Falls, Idaho, CEO Josh Bradshaw, CCO Celise Sir, and CMO Christina Dara have built a remarkable culture and have become a provider of choice in Eastern Idaho. CIMBY's culture is the foundation of its success, as is evidenced by a 100% employee engagement score and 90% employee satisfaction score. CIMBY is building a continuum of care in its local community, which includes not just home health and hospice, but also in-home provider services and wound care. By offering this effective continuum, CIMBY has increased its revenue 46.6% and its EBITDA 120.3% each over the prior year. In Tucson, Arizona, at Sherwood Village Assisted Living and Memory Care, CEO Russell Sylvester, CWO Kimberly Frejo, and CMO Jenny Fay continued to create a legacy of incredible care by elevating culture and providing an exceptional resident experience They continue to be a solution to their local community, as demonstrated by their 91% occupancy rate. Engaged employees tend to drive strong results, and Sherwood is no exception. Sherwood's turnover is significantly below industry standard, and its employee satisfaction is 85%. Financial success has followed, with EBITDA growth of 25.7% in 2024. With that, I'll turn the call back over to Brent for concluding comments.

Thanks, Lynette. As we conclude, I'd like to once again thank all the operators and clinicians who, like those highlighted above, dedicate themselves daily to providing life-changing service to our patients and residents. You are truly making a difference in the lives and communities we serve, and it is an honor to work alongside you. With that, we'll open it up for questions. Josh, can you please instruct the audience on the Q&A procedure? Thank you.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for questions. Our first question comes from Stephen Baxter with Wells Fargo. You may proceed.

Hi, thanks. I just wanted to start with the re-acceleration of same-store growth, particularly in the home health and hospice business. It looked a lot more like the growth you had in the early part of last year than maybe the growth you saw in the fourth quarter. I was wondering if there's anything that you would call out in the first quarter specifically as a driver of that reacceleration or anything as you look back at the fourth quarter that gives you maybe a sense that there was something about the fourth quarter that was a little bit of a one-off dynamic that you've now worked through. Maybe we could start there and I have a couple of follow-ups.

Yeah, thanks for the question, Steven. And I think as you look at the trajectory that we experienced last year, that same store growth was strong throughout the year. And we really believe that that is consistent with our unique approach to being a locally driven solution in the community. Every year in the fourth quarter, we experience some seasonal decline during the holiday season as patients and their families often are reticent to choose hospice and sometimes even home health. And then we see that pick back up in the first quarter. And so I don't think there's anything there more than seasonal change. But as far as you look year over year, we've continued to have that double-digit growth from an ADC standpoint on the hospice side and on the home health admission side. And so We think that it reflects some really positive trends in the community choosing us, and we're excited to see it kind of building steam in the first quarter.

Okay. I appreciate that. And then, you know, just hoping that, you know, maybe you could expand a little bit on, you know, the guidance expectations, you know, loud and clear that, you know, you're now expecting to be in, you know, the upper part of the range. Just as we think about the outperformance, You know, would you call out, you know, maybe one business is maybe a bigger contributor than the other in terms of the segments? Are we thinking EBITDA margins are also higher or the same kind of EBITDA margins that were embedded on, you know, the initial guidance but potentially just higher, you know, revenue against that? Like how do we think about the kind of moving pieces inside the guidance as well? Thank you.

Yeah, I might, this is Brent, and I might let Lynette respond on specifics in the guidance model. What I would say is both of our segments have performed really well, so we're excited about the progress, you know, the revenue quality on the senior living side and In addition to some of the margin improvement, we've had really outside performance as well on the home health and hospice side. And we called out signature the transition of those that larger acquisition part of the reason for I mean, at this point, we're essentially. Pointing to the top end of the guidance, we're very, we're really excited about the progress that we've made. But with any new transition, we're always we want to be conservative and ensure that sort of the trends continue. So we would expect if we continue to perform well to see opportunities on the guidance front. So at this point, we're really excited about the progress we've made. Obviously, we had a really strong quarter and we're seeing strong improvement in both segments at the same time. So all in all, it's just just really good momentum across the businesses.

I'll get back in the queue, though. Thank you.

Thank you, Steve. Thank you. And as a reminder, to ask a question, please press star 1-1 on your telephone. One moment for questions. And I'm not showing any further questions at this time. I would like to turn the call back. We have one question. One moment, please. Our next question comes from Steven Baxter at Wells Fargo. You may proceed.

Yeah, hey, thanks. I have a couple more maybe to touch on if there's the time for it. So I'm not sure how much you can really say at this point in time around the Optum transaction that there was the announcement on. Just philosophically, as you think about your willingness to kind of look at a transaction that looks like that, I would love to just get a little bit of color about what goes into the evaluation of that. I mean, how we should think about that looking in terms of you know, potentially requiring new clusters versus kind of folding into, you know, existing geographies. Let's just get the company's kind of philosophical, you know, perspective on looking at a transaction that's maybe a little bit different than other ones you've pursued in the past.

Yeah, Steven, it's a great question. Obviously, we've already mentioned it. We filed the 8K and due to the ongoing antitrust process, we're pretty limited on what we're going to be discussing. We're certainly excited to partner with UHD and Amedisys. We see these as high-quality assets. And it does give us an opportunity to expand in new and compelling markets. Beyond that, we'll kind of refer you to the 8 on any additional details. The one thing I'll say just in general about the way that we evaluate any sort of acquisitions is really the opportunity to have great leaders step into place. So we've been building a leadership pipeline over time. And so we feel confident that we have leaders and we'll continue to develop leaders to be able to step into those opportunities and that we can support it through our current operations. And so those are kind of two of the key factors. And then obviously it has to be a compelling opportunity overall. And so, as we evaluate this deal along with, you know, any other deal, that's kind of the way that we process it. The other thing I would point to, obviously, the signature transaction was a larger transaction for us, and we've been really positive with the early returns in that, and it's given us confidence to continue to build on a larger platform. and especially where you've got strong assets and performing assets, to be able to sort of fold in strong assets and create opportunities for local leaders, it creates a pretty compelling story. And so those are just a couple of the factors that we consider as we evaluate a deal such as this.

Got it. Okay. And then I'll just lob in, you know, a couple of other ones. In terms of thinking about the level of rate growth that you saw in the senior living business in the first quarter, I think obviously that's a very strong number. Obviously, the first quarter occurred before a lot of the current broader macro and maybe market uncertainty that we're dealing with right now. This reminds us philosophically how to think about the senior living's economic sensitivity I had to think about these people are obviously dealing with kind of a fixed income situation here as they're considering these potential changes. Just in general, what's the right way to think about your ability to maybe continue to realize the strong price growth in the back half of the year and whether the macro gives you any kind of concern or there's risk to that as a result?

Yeah, there's always some sensitivity to the macro environment, especially in particular for our private pay residents. That being said, and we kind of talked about it in the call, our focus over the last really couple of years has been improving our revenue quality. That could mean by payer, it could mean by, you know, just ensuring that we're charging the right rates at the local operations. And so, we've had a pretty robust effort to improve, and that's why you've seen such robust, we're over 11% this quarter year over year. And so, from that standpoint, there is sensitivity, but there's also sort of a balance between, in many of the markets that we have, we do have roughly about 30% of our business that is... Medicaid or state waiver program and so there's an opportunity and oftentimes those programs are robust enough that they create value and so from that standpoint we've been able to partner in the right way with the the right programs to create opportunities there so that does impact a little bit some of that sensitivity because we can go and find a partner with some of these programs and still in many cases get reimbursed at or you know near private pay rates and And then, you know, from an occupancy standpoint, we've been pretty flat, and I think it's primarily because of that focus on really getting the right level of revenue quality. One of the things that we're really, really focused on now is sort of thinking about that price sensitivity, ensuring that we can couple increased REV4 growth with occupancy growth. And so we've sort of targeted a mid-single-digit REV4 growth over the year. Obviously, we're trending above that right now, and so that's a good sign, but it also means that there may be some opportunity to drive census growth as we sort of manage that REV4 growth at the same time.

Okay. Thank you. And then maybe the last one from me would just be, you know, it'd be great to get an update on what you're seeing in the hiring. environment, whether you feel like there's been any change in the trends that you maybe discussed more recently. That's probably it for me. Thank you.

Yeah, no, appreciate that. And what I would say, Stephen, is that we have seen strong trends both in hiring and retention. And we're excited about that because anytime you're experiencing the type of growth that we are experiencing, it comes back to our ability to attract and retain talent. And so adding more than 200 net nurses in the first quarter year over year is something that we're excited about. It shows sort of our capacity to retain those existing talented clinicians who have entrusted us with their careers, also to add new clinicians, both from Signature and across the platform. And so really strong trends on that side of the business. Similarly, in senior living, we've been able to continue to staff and be prepared for growth as that occurs. And so we feel pretty excited about where we stand right now. Obviously, there's a lot of economic dislocation that could happen as things trend over the year. And so we're watching it very closely. But the trends so far this year have been positive. On the labor inflation side, we continue to see somewhat elevated labor cost inflation, particularly on the senior living side, I would say, where we saw about just under 5% labor inflation. On the home health and hospice side, we saw it was a little more normalized in the 3.2% range. And so we continue to see a little bit of normalization, and that's going to be an important piece in us continuing the growth that we've experienced throughout the last few years.

Okay, got it. Thanks so much.

You bet.

Thank you. I would now like to turn the call back over to Brent Garasoli for any closing remarks.

Right. Well, thank you, Josh, and thank you, everyone, for joining us today.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.