Enhabit, Inc.

Good morning, everyone, and welcome to Inhabit Home Health and Hospice second quarter 2022 earnings conference call. At this time, I would like to inform all participants that their lines will be in a listen-only mode. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star 1 on your telephone keypad. You will be limited to one question and one follow-up question. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Jennifer Hills, Inhabit Home Health and Hospice Chief Investor Relations Officer. Please go ahead.

Thank you, Sarah, and good morning, everyone. Thank you for joining Inhabit Home Health and Hospice second quarter 2022 earnings call. With me on the call today are Barb Jacobs-Meyer, President and Chief Executive Officer, Chrissy Carlyle, Chief Financial Officer, and Chad Knight, General Counsel. Before we begin, if you do not already have a copy, the second quarter earnings release supplemental information and related Form 8-K filed with the SEC are available on our website at inhabit.com. On page two of the supplemental information, you will find the Safe Harbor Statements. which are also set forth in greater detail on the last page of the earnings release. During the call, we will make forward-looking statements which are subject to risk and uncertainties, many of which are beyond our control. Certain risks and uncertainties that could cause actual results to differ materially from our projections, estimates, and expectations are discussed in the company's SEC filings, including the earnings release and related form 8K. The Form 10 Registration Statement filed on May 25, 2022, as amended on June 8, 2022, and June 14, 2022. We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance, and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information at the end of the earnings release and as part of the Form 8-K filed yesterday with the SEC. all which are available on our website. I would like to remind everyone that we will adhere to the one question and one follow-up question rule to allow everyone to submit a question. If you have additional questions, feel free to put yourself back in the queue. With that, I'll turn the call over to Barb.

Thanks, Jennifer. Good morning, everyone. Thanks for joining us today for our first Inhabit earnings call. Let me begin by recognizing our field staff. They are the inhabit our patients and families experience each day. It is so rewarding to receive the letters, emails, and calls from our patients and families sharing their stories with me about the impact our staff has made on their lives. I'm very proud of our entire team's work over the past year and particularly over these past three to four months as we work towards our spinoff from Encompass Health. It has been a busy and rewarding time for all of us. We are proud to be Inhabit and we are excited for what the long-term future holds as we focus on a better way to care for our patients. We are confident in the growth potential for Inhabit as more and more seniors prefer to age in place in their homes. Now let's discuss the home health proposed rule. On June 17th, CMS published its proposed rule for 2023, which includes a 7.69% permanent negative behavioral assumption adjustment. The cut would be partially offset by a 3.3% market basket update reduced by a 0.4% productivity adjustment that would result in an approximate 4.2% negative payment impact for 2023. The proposed rule also includes language around a clawback of an additional $2 billion from the industry for assumed overpayments from 2020 and 2021. We are opposed to these cuts and strongly disagree with CMS's approach, interpretation, and resulting recommendations. Inhabit, along with its trade associations and industry partners, are pushing back hard on this rule. We are currently working with our legislative supporters on Capitol Hill to mitigate these cuts. On Monday of last week, Senator Debbie Stabenow Democrat from Michigan, and Senator Susan Collins, Republican from Maine, introduced the Preserving Access to Home Health Act. An identical companion bill was introduced in the House last Thursday by Congresswoman Terri Sewell, Democrat from Alabama, and Congressman Vern Buchanan, Republican from Florida. The bill would immediately prevent CMS from implementing the proposed permanent and temporary adjustments to home health prior to 2026. This would allow more time for the industry to work with CMS to refine its proposed approach to determine budget neutrality in home health. I would like to take this opportunity to thank them for not only introducing this legislation, but also for their years of ongoing support for the industry. For hospice, the final rule was released, and it acknowledged higher inflationary trends and provides a 3.8% update for hospice payments for fiscal year 2023, an increase over the proposed rule. Now let's get into quarter two for inhabit. We knew quarter two of 2022 faced a difficult comp as quarter two of 2021 was the strongest quarter of that year as the country rebounded from the COVID pandemic. Net revenue for the second quarter of 2022 was $268 million. with adjusted EBITDA of $40.3 million. This compared to net revenue of $286.1 million and adjusted EBITDA of $57.8 million for the same period in 2021. Several factors impacted our decline in admissions for both home health and hospice, including an increase in the use of paid days off, vacation time year over year, coupled with less availability of our PRN staff for coverage, challenges early in the quarter with rebranding as it impacted e-referral systems, and a general decline in admissions from acute hospitals. Regarding paid days off, on the clinical field service side, we experienced a 7.4% increase in the use of paid time off year over year. On the sales side, we experienced a 2.2% increase. We know from employee engagement feedback that work-life balance is a top priority, and our staff are excited to finally use PDO for travel and fun versus quarantines and sick time. Staff have commented how great our PDO plan is, but the plan should not be difficult to actually use for time off. In these times of labor shortages, taking care of our patients is a top priority for healthcare providers. but we have to find ways to give our staff the time off they have earned. We covered some of this time off with extra visit pay and PRN usage. PRN staff are those staff members that work for a per visit rate on a when needed, when available basis. They have no specific commitment of hours worked. Many PRN staff members are on staff with multiple companies. Although our number of PRN clinical staff has been stable, We had 30,000 less PRN visits year over year, mainly due to the availability of the PRN staff. This impacted conversion of referrals. PRN staff have an important role to cover paid time off, FMLA, sick time, and regular staffing vacancies. Our compensation team is currently evaluating structure and compensation in each market to determine potential competitive adjustments that may need to happen. Another impact to our admission volume was the temporary impact of our rebranding with electronic referral systems early in the quarter. These electronic systems have grown over the pandemic as an increased number of facility-based healthcare providers have relied on these systems to send referrals to numerous post-acute providers simultaneously. Instead of handing a referral to a care transition coordinator or a sales account manager or faxing them, The discharge planners use these electronic systems to find home health providers in the patient's zip code and work with the patients to select a few providers. Then the discharge planners send the request to the various providers. It is critical to respond in a timely manner if you can accept the referral. In April, we saw these referrals decline and discovered additional work was needed by us and the electronic referral companies to ensure we had a successful creation of each inhabit location page and that there was a link with the previous encompass selection that would direct them to inhabit. All e-referral systems have now been updated and in June we saw these referrals normalized. The temporary e-referral issue was part of our decrease in admissions from acute hospitals. Additional impacts came from the significant decline year-over-year in COVID patient volumes at acute hospitals and the decrease of electives at acute facilities. Our total electives were relatively flat year-over-year with the ongoing shift of our elective admissions coming from surgery centers. This shift has impacted our payer mix as there is a higher Medicare Advantage mix of these patients in the surgery centers. The continued shift in our total patient-payer mix is impacting our adjusted EBITDA and our margins. We experienced a 21.5% increase in non-episodic admissions this quarter. Medicare Advantage enrollees continue to outgrow traditional Medicare, and we must meet our referral sources' needs for these patients so that we can grow both episodic and non-episodic volumes in home health. To address this opportunity, we promoted a proven leader in our organization to lead our new payer innovation team. She has been very successful selling our value proposition over the years to ACOs and DCEs. In the past, our contracting team focused on contract term negotiations. Adding her talent to oversee this with a payer innovation focus has us already at the table with several national payers. The discussions are now on how we can work collaboratively towards each of our goals. We need to be paid fairly for the high quality we provide, especially our ability to reduce or mitigate hospitalizations. Payers need better and more timely access to home health services for their members and assistance in managing gaps in care. We are early in these discussions but pleased with initial reactions. Turning to hospice, Revenue declined as a result of lower ADC driven by lower admissions in the first two quarters. We added a great talent to our team in June of this year with an EVP of hospice. She comes to us with over 30 years of hospice experience in both sales and operations. In her first two months, she has identified opportunities for improving our clinical care model and diversifying our sales process. We saw an increase in admissions and a steady climb in referrals in June that have continued into July. With referrals increasing in both home health and hospice, our admissions will improve as we experience continued progress in our net new nursing hires. We had 96 net new nursing hires in quarter two versus 27 last year and versus 30 in quarter one of this year. Our vacancy rate has remained stable around 25% over the past year. We currently have 667 nursing openings compared to 688 last year. It's important to remember that the denominator of total positions is not static. As we grow and as we promote some of our clinical staff into leadership roles, we create additional openings. That's why we focus on the number of staffing-constrained locations. Our net new hires have resulted in a decline in the total number of staffing-constrained locations. We exited the first quarter of 2022 with 69 home health locations and 20 hospice locations constrained due to staffing. We exited the second quarter with 53 home health and 17 hospice locations constrained. We have continued to make progress and currently we have 41 home health and 13 hospice locations constrained due to staffing. We will maintain a hyper focus on our clinical staff recruitment. However, with this hiring progress and net new nurses, we are now in a position to focus on sales. We currently have 71 less sales headcount in home health and 18 less in hospice year over year. There's no perfect science to this, but we need to make sure our local branches are staffed and have available capacity so a sales team member can say yes and feel success in their role. We are focusing these hires in the markets where we have built clinical capacity. We remain very confident in the long-term growth potential for home health and hospice. Organic growth is a clear focus for our talent acquisition, sales, and operation teams. Growth in de novos and acquisitions are also key to our long-term growth strategy. We have opened three de novos year-to-date and continue to work towards our goal of 10. Our acquisition development pipeline has experienced strong growth over the past few months. Clarity around inhabit and the spin has increased our inbound calls and the acceptance of our outbound calls. We are confident we will meet our goal of $50 to $100 million in acquisitions in 2022. I'm proud of the management team we have assembled. We have a great blend of strong tenured and habit leaders and new experienced leaders. Every challenge we identify is followed with actionable plans that will drive our long-term success. The cadence of results of these actions is important as we look towards the back half of 2022. Some of the critical drivers such as payer innovation and talent acquisition and retention take time. Based on these and other drivers, we are revising guidance. Our updated guidance includes revenues of $1,075,000,000 to $1,110,000,000 and adjusted EBITDA of $155,000,000 to $170,000,000. The low end of the guidance assumes no substantial improvement from our quarter two performance in the back half of the year. The high end assumes our payer mix improves slightly, productivity improves, we see improved growth in completed episodes for home health, and our hospice ADC returns to quarter four 2021 levels or higher. Chrissy will go into more details on the various levers. With that, I will turn it over to her.