Enhabit, Inc.

Good morning, everyone, and welcome to Inhabit Home Health and Hospices First Quarter 2024 Earnings Conference Call. At this time, I'd 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 period. You will be limited to one question and one follow-up question. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Chrissy Carwile, Inhabit's Chief Financial Officer. Chrissy, you have the floor.

Thank you, operator, and good morning, everyone. Thank you for joining our call today. With me on the call is Barb Jacobsmeyer, President and Chief Executive Officer. Before we begin, if you do not already have a copy, the first quarter earnings release, Supplemental information in related form 8K filed with the SEC are available on our website at .ehab.com. On page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth 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 our SEC filings, including our annual report on form 10K, which are available on our website. 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 and the earnings release. With that, I'll turn the call over to Barb.

Thanks, Chrissy. Good morning and thanks for joining us. Our strong start to 2024 is a result of our team's continued focus on our operational strategies. Additional frontline clinicians, more and better home health payer contracts, and controlling GNA expenses were the key drivers of our performance in the first quarter and resulted in sustained consolidated adjusted EBITDA of 25.3 million in line with last year's first quarter results. As our employees stated on our recent employee survey, their engagement is driven by the knowledge that our work is meaningful. No matter the role, clinical or support staff, they recognize that what they do impacts our patients' lives. During this celebration of Nurses Week, I especially want to thank each and every one of our nurses for their dedication to our mission and to our patients and families. Inhabit's high quality outcomes are a result of our employees' hard work and I am proud of our entire team. In our home health segment, we are focused on achieving growth, re-stabilization of Medicare admissions, continued progress with our payer innovation strategy, and increased utilization of our clinical resources. With our traditional Medicare mix of home health revenue now in line with peers, we are experiencing stabilization of our -for-service Medicare mix. While -over-year -for-service Medicare admissions declined 11.4%, we experienced a sequential increase of 3.4%. Our payer innovation team continues to do a great job building our portfolio of payer contracts and our field teams are successfully shifting admissions out of historically lower paying contracts to these new contracts at improved rates, contracts that acknowledge the high quality care we provide to the payer's members. Admissions in our historically lower paying contracts declined from 42% of our total admissions in quarter one 2023 to 29% in quarter one this year. As these results show, our payer innovation strategy is working. We continue to be disciplined in our approach with payers as we work to negotiate new agreements and remain focused on moving volumes away from the lower paying agreements. We are committed to the renegotiation of historic contracts to improve rates while holding firm to our conviction in the value we provide and we'll make the decision to terminate agreements when necessary. Finally, in both our home health and hospice segments, our teams are focused on ensuring that the intensity of care aligns with patient acuity and complexity of care needs within the important context of what matters most to patients in their journey. Staffing challenges and the increased demand for our services have created a mandate for us to effectively manage clinician visits. However, our strategy is not to simply reduce visits across the board but instead to effectively right size each plan of care to ensure patients receive a just right care plan. For some, this means fewer visits. For others, it may mean more depending on their unique presentation. Overutilization and underutilization are equally harmful to our patients and our business. Additionally, some patients can benefit from virtual encounters which is convenient and efficient for our agencies and our patients who are beginning to understand and enjoy the benefits of tech enabled care. We continue to explore how implementing virtual care in a strategic manner can benefit both service lines as well as the patients and families we serve. We plan to expand the scope of virtual care at Inhabit in 2024 in an effort to improve efficiency, capacity, patient outcomes, and patient experience. MediLogix Pulse supports our visit optimization strategy for our home health teams and MediLogix supports the strategy for our hospice teams. Leveraging predictive analytics bolsters our ability to deliver a better way to care for patients and families in a more efficient manner without compromising patient outcomes. Our competitive position in terms of patient outcomes including hospitalization rates and visits at the end of life is what sets us apart when negotiating with payers and establishing strategic referral relationships. In our hospice segment, our priority is growing census which will allow us to gain operating leverage against the fixed cost structure associated with the case management staffing model. Our sales headcount is now above last year's count and we are focused on utilizing data from our loss loyalty reports to strengthen relationships with referral sources. In addition, we are working with our talent acquisition team to continue to recruit additional business development team members to grow the business. To complement our organic growth strategy in both segments, we continue to strategically reinvest for growth through our de novo strategy. This allows us to enter a new market with low capital costs. We added two hospice de novo locations in the first quarter and the work is underway to open 10 more de novos in 2024. A critical key to our organic and de novo growth is our people strategy. We were pleased with our recent employee engagement survey which saw a net promoter score in the top quartile of healthcare companies. We are seeing continued success with our recruitment and retention efforts. During the first quarter, our full-time nursing candidate pool increased 30% year over year and resulted in the addition of 151 new full-time nurses. I will now turn it over to Chrissy to discuss the quarter's results.

Thanks, Barb. Consolidated net revenue was $262.4 million for the first quarter, down $2.7 million or 1% year over year. Our strategy to increase admissions and payer innovation contracts lessened the impact of mixed-ship, contributing to sustained consolidated adjusted EBITDA of $25.3 million in both the first quarter of 2024 and 2023. Before I move into the results of our home health segment, I want to mention the reporting change we made in the first quarter. With an advanced episodic model added to our payer innovation contract effective January 1, 2024, we have updated how we report volume and pricing metrics for our home health segment, separating traditional Medicare from all other payers. The prior periods were changed to conform to the current period presentation and had no impact on the consolidated financial statements. In our home health segment, we experienced strong growth in Medicare Advantage admissions and, as Barb discussed, stabilization of Medicare admissions. Year over year, non-Medicare admissions grew 25.2%, driving total admissions growth of 5.3%, with 5% growth on a same-store basis. This is the strongest same-store growth we've experienced post-hour spend-off and proof that our payer innovation success will drive positive results. 38% of non-Medicare visits are now in payer innovation contracts at improved rates. This is lessening the financial impact of mixed-ship to Medicare Advantage. During the first quarter of 2024, the shift to more non-Medicare admissions reduced revenue and adjusted EBITDA approximately $2 million on a net basis. That $2 million is comprised of approximately $6 million of negative impact from the mixed-ship, offset by approximately $4 million in non-Medicare pricing improvement. Home health adjusted EBITDA decreased $1.1 million, or 2.5%, year over year, as the mixed-ship and increased cost of service were offset by a reduction in general and administrative expenses. Cost for a visit increased .3% year over year, primarily due to merit and market rate increases. General and administrative expenses decreased $3.4 million, or .4% year over year, primarily due to a new organizational structure implemented the first quarter of 2023 to align our sales and operations teams. In our hospice segment, revenue decreased $0.1 million, or 0.2%, year over year, as increased Medicare reimbursement rates were offset by a decrease in patient days. Admissions decreased .9% year over year, while average daily census decreased .7% year over year. Sequentially, hospice admissions grew .6% over the fourth quarter of 2023. We saw a sequential decline in average daily census throughout the fourth quarter of 2023, followed by a sequential increase in average daily census each month of the first quarter of 2024 that persisted into April. As we continue to ramp up our business development team and balance our portfolio, we expect average daily census to grow throughout the remainder of the year. Adjusted EBITDA in that segment increased 0.6 million, or .1% year over year, primarily due to a decrease in general and administrative expenses. Cost of service continues to approximate $24 million per quarter. In terms of dollars, we were able to keep costs relatively flat as we have anniversaryed the implementation of the case management staffing model, and we were able to offset the increased costs associated with the new durable medical equipment arrangement as we discussed during our fourth quarter earnings call with the savings that resulted from the elimination of contract labor. We continue to expect patient volumes to increase without the need to hire a significant number of additional staff, resulting in operating leverage against the fixed costs associated with our case management staffing model. General and administrative expenses declined year over year, primarily due to the restructuring of hospice back office staffing in the third quarter of 2023. Our home office general and administrative expenses decreased 0.5 million year over year to .3% of consolidated revenue. By the end of the first quarter, we fully transitioned off the Encompass Health Transition Services Agreement. Let's transition now to the balance sheet. We ended the first quarter with a leverage ratio of 5.3 times, well within our covenant maximum of 6.75 times, and less than our year-end 2023 leverage of 5.4 times. We have available liquidity of approximately $70 million, including approximately $37 million of cash on hand. We believe this is adequate to support our operations, including our de novo strategy. We generated approximately $19 million of free cash flow during the first quarter of 2024, which equates to a free cash flow conversion rate of approximately 74%. This conversion rate includes the positive impact from the timing of payroll in the quarter. Let's turn now to guidance. We feel good about our consolidated results for the first quarter and remain confident in our outlook for 2024. We maintain our 2024 guidance that includes a range for net service revenue of $1.076 billion to $1.102 billion, with adjusted EBITDA in a range of $198 million to $110 million. We continue to generate, we continue to expect to generate $36 to $62 million of free cash flow in 2024. With that, I'll turn it back to Barb.

Before we open the lines for Q&A, as it relates to our strategic alternatives process, as announced yesterday in a separate press release, after the evaluation of a full range of strategic alternatives with the support of external financial and legal advisors, our strategic review process has concluded. There was serious interest based on parties engagement in the process. However, the company did not receive any formal proposals for a transaction. We believe this is largely due to macro headwinds, including among other things, uncertain regulatory developments, including Medicare reimbursement policies throughout the healthcare industry and an evolving antitrust landscape, a difficult healthcare and operating environment and persistently high interest rates. Considering this and other strategic alternatives reviewed with the advisors during the review process, the board determined the best way to enhance shareholder value at this time is to continue to operate as a standalone business. The board and management team remain focused on operating our core businesses and our financial and operating results. The board will continue to be open to and consider all opportunities to enhance shareholder values. I want to remind everyone that the purpose of today's call is to discuss our financial and operational results and we will not be taking any questions regarding the strategic review or any other topic. Operator, we're now ready for the

lines to be open for questions.

Thank you.

Once again, if you would like to ask a question, please press star followed by the number one on your telephone keypad. 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, please feel free to put yourself back in the queue. We'll pause for just a moment to compile the Q&A roster. Our first question comes from AJ Rice at UBS. Your line is open.

Hi, everybody. Maybe on the cost per visit increase, obviously a 2% to 3% increase is what you've guided for and you seem to be running at that. I'm assuming your underlying salary wages and benefits are running at least 3% to 5%. I think visits per episode were slightly down a tenth of a day. It would look like looking at the peers, maybe you've got some more room there. Can you just comment on the dynamics? What's offsetting those labor cost trends, if indeed I'm right about roughly where they're running and how much more opportunity you might have on the driving down visits per episode over time?

AJ, I'll take some of the cost per visit questions and then maybe Barb can address the visits per episode. On the cost per visit, I think the one thing I didn't hear you mention is the elimination of contract labor. That was a significant benefit to that cost per visit number and part of the guidance considerations for the year. Yeah, you're right. The merit market increases are around 3% or so. Then the teams are just doing a great job again having eliminated all contract labor, those long 13-week contracts by the end of 2023 and then managing the productivity and optimizing our staff.

Then on the visits per episode, if you remember we had piloted that for a long time in 17 branches. We would say that right now when we look at where we are with the rollout, we completed the rollout by the end of the third quarter to all of our branches and where we are today is similar to where we were when we were 17 branches. It means rolling it out and then also spending time with the dashboards to make sure that the leaders are using the visit utilization recommendations again to go from low intensity to higher intensity needs for patients. We know that we still have opportunity as it relates to managing visits per episode, but at this stage we're where we were when we piloted in those 17 branches.

Okay, maybe a follow-up then on your resegmentation of your home health segment to have this non-Medicare segment. That's going to obviously include MA episodic, which has fairly high margin or higher margins, and MA provision, which is lower margins. So two items that are quite different on the gross margin profile. How do we think about the gross margin of that segment going forward and how is it likely to trend?

Yeah, so I think when we think about Medicare and non-Medicare reporting, one we believe is more peer-like, so that should make us more comparable to what you're historically seeing from there. You also have enough information within our disclosures to, while we acknowledge that that non-Medicare number includes episodic, you still have the information you need to get really close to here's my non-Medicare revenue, here's my total visit, and you can still run it on a per visit basis to see what's happening from a rate perspective. And you can see the success that we've made with that rate from this time last year to now. So I think it's all there. It's probably a little bit easier to model the way that we're presenting it, given that you're not trying to model three different sets. You've got these two, just traditional Medicare and non-Medicare.

Okay, thanks a lot. Our next question comes from the line of AJ Rice with

UBS. Your line is open.

AJ was just on, Operator.

I'm sorry about that. The next call comes from the line of Jason Casora with Citi. Your line is open.

Great, thanks. Good morning. Maybe just a follow-up on AJ. I mean, can you help unpack a bit on the payer innovation side, specifically on the pricing of those visits? Because non-Medicare revenue per visit was up, I guess, 4%. Year over year, payer innovation visits grew by 190,000. Non-payer innovation visits were down almost 100,000. I guess, can you just help us get a sense of the moving pieces around the non-Medicare revenue per visit? It would kind of imply that payer innovation visits in the quarter weren't as significantly higher reimbursed versus the legacy. Just any help on the color around the payer innovation and the revenue per visit, instead of the non-Medicare? It would be great to start.

Thanks. Yeah, Jason, one of the things that we have to be very careful of is these national agreements prohibit us from discussing the details around those agreements. And so, given that we have the one large national agreement that is an advanced episodic model, if we get too far into the details, that's not going to be good for either party. So, we have to be very careful of that. And that's part of the reason, again, that we did make the decision to go with Medicare and non-Medicare. I can tell you that the historic statements we've made around episodic pricing and the discounts as a whole, we're still in that kind of 0 to 25 to 30 percent discount. And that is far better than the 35 to 40 percent discounts that we have historically seen before we had our payer innovation

teams. Okay, fair enough. Maybe just on the Medicare episode declines, you've discussed in the past that the lack of M.A. contracting was a gating factor with referral services. I mean, I guess maybe what's the update there? Is there increased momentum coming out of that national contract that began earlier this year? Should we start seeing Medicare episode declines more in line with your market trends at this point? Just any updates there would be helpful.

Sure. So, when we look at, you know, kind of that quarter three, quarter four, quarter one, we have shown the stabilization of those Medicare admissions. We do think that being on more of the payer contracts has helped us with that. But to your point, we've just started gearing up the new national M.A. So, I do think that will continue to help us be seen and has helped us be seen as a stronger provider to our referral sources. So, the goal is to continue to receive a very healthy payer

mix from our referral sources.

Okay, thank you. Our next question

comes from the line of Brian Tankulet with Jefferies. Your line is open.

Hey, good morning. Thanks for taking the question. It's Jack Levenon for Brian. Appreciate all the color on the review and don't want to dig into the details there, but maybe just taking a step back and as you think about strategic priorities going forward. Coming out of the review, do you think there's any change there or are the sort of pillars of what you're trying to drive towards still the same?

I think the pillars are still the same. I do think that there's some things that we are going to be focused on from an innovation standpoint. We do now have our own data warehouse as we transition completely off of Encompass. So, I think that's now going to allow us to have our own data to build our business intelligence tools. So, there will be some focus on using some of that to help us as we look at things like intake, workflow, and other

tools to help our team in the field.

Got it. Okay, that's really helpful. And then, Chrissy, maybe just thinking about the balance sheet. You know, cash generation looks pretty solid in the quarter. Can you just speak to sort of what the pathway is to delever and sort of how you're thinking about that on the multi-year look?

Yeah, sure. So, stabilization of EBITDA and the required amortization of the term loan are expected to help us to continue to delever in 2024. You know, one of the biggest factors in that deleveraging from Q4 to Q1 was the fact that EBITDA stabilized. We continue to have strong free cash flow, as you mentioned. That allows us to make payments beyond the required amortization, which also results in lower interest expense, which in turn generates more free cash flow. So, we believe we're getting ourselves into a good cycle now that EBITDA has stabilized. We fund operations without drawing on the revolver. I want to remind everyone that we have only drawn on that revolver once in the fourth quarter of 2022 when we had over $50 million of tax payments related to acquisitions and the deferred payroll tax from COVID. So, we like where we're headed. I think one way to think about it is if you historically target a 50% free cash flow conversion and then you have the EBITDA guidance range, that's how you can think about the cash flow we have to delever. Consider two or three million of that free cash flow for the denovo, and then the priority, of course, would be to use the rest for debt reduction.

Got it. Really helpful. Thanks again. Our next question comes from the line of

Joana Gajuk with

Bank

of America. Your line is open.

Hi. Good morning. Thank you so much for taking the question. So, I guess the follow-up here on your guidance, right? So, how was the quota versus your internal? You said you kept your guidance. The range is pretty wide. So, any update on the view around the variability between the low and the high end of the range?

I would say that there's no real update at this point, Joana, as we mentioned previously. We think we're starting the year in a much better sense with those two national agreements that have better rates and that can help us be a better resource to those referral sources. The key assumptions in the range continue to be Medicare as a percent of total home health revenue, the shift to the payer innovation contract, and then just hospice patient days growth. I think we covered all of those in our comments. In regards to the cadence, Q1 and Q4 tend to be our strongest quarters in regards to volume because that's when patients are the sickest. They fall on the ice or they have flu-related symptoms and such and need our care. Q2 and Q3 do tend to be impacted a little bit by pay time off, vacation, both of our staff as well as our referral sources. And we think that, again, we're in a better position this year to manage through at least the PDO portion of our staff based off the success that we've had with recruitment and retention of our clinical teams. We've been reporting over 100 new nursing hires for several consecutive quarters now. So, again, we feel good about our ability to change that trend going forward and that we'll have a moderate EBITDA bill throughout the year.

Great. Thanks for that. If I may, also a follow-up, I guess, or maybe you, but around your innovation plans or the contracts. So, when you negotiate these rates, I guess, so maybe that's separate from your new contracts, but I guess when you negotiate for existing contracts, because it sounds like there's also some of that is happening where you try to improve the rates for some of the other things. So, first of all, is that the case? Are you trying to do that too? And if you do, what kind of rate increases are you getting? And then when you do that, are you also trying to get a relief on the utilization management as in increasing the number of visits that are authorized by these MA plans? And then I guess somebody was trying to ask the question, how much is this pricing is improving on these low-paying contracts? Thank you.

Sure. So, I would say that, yes, we continue to negotiate and work on new contracts, but as we mentioned, there is also a focus on renegotiation. So, the new contracts that we've brought into the payer innovation since 2022, none of those are up for renegotiation yet. So, our renegotiation is really focused around one large national plan and more of smaller regional plans, many of those of which came through acquisitions over time. When we go in for the renegotiation, so we approach it just as we do with new plans, and that is trying to prioritize getting an episodic agreement if we can, and then if not, to work better on the per visit rate. I will tell you though that, you know, one of the things that we're doing is sticking to our, we need to have no more than that 25 to 30%, or we now are in a place where we will walk away. It is many times easier for our business development team members to say we are not in contract than it is to not accept. So, that's where we're at now. Now that we've built up the good contracts, we can be

a little bit more firm with the legacy ones. Great. Thank you so much.

Our next question comes from the line of Ryan Langston with TD Cohen. Your line is open.

Hi, good morning. Sounds like the candidate in the nursing pool is, I think, Barb, you might have set up 30%, which is good. I guess how to think about other types of clinical supports, like therapists or any of the like?

Sure. I would say we are back into really working to recruit therapy now that we have built out more of the frontline nursing to grow. We do add some therapy positions. Overall, we do well from a therapy recruitment and retention. There are some key markets where it is more difficult, tends to be more of your rural markets that don't have a lot of therapy schools around the area. So, those areas are ones that we focus on to see if there's other ways that we can encourage to get the candidate pool. But when we look at this from a national level, we do well on therapy recruitment and retention.

Great. And just real quick, I had a little trouble getting into the call. It looked like AR was up a little bit. Christy, I think you said in the fourth quarter, just some timing impacts, but it looks up about 10 million sequentially. Was there any impact from change, the change disruption there or anything else to call out?

Yeah, well, while change is not our primary clearinghouse and we don't directly use them, some of our payers do. And so, we did have a period of about 30 days where payment delays resulted as a result of the change health incident. We are getting those payments just not as quickly as usual. And some of them are coming in via hard copy checks versus some of the automated methods as well. The other increase that we're seeing is just, again, as Medicare advantage continues to grow, Medicare advantage does take longer to bill and collect. There's just an administrative burden associated with it. But we do have some things underway with our revenue cycle strategy and team. I expect to see some movement on that in the coming quarters.

Okay, thank you. Thank you. I will now turn the call back over

to Christy Carlyle for some closing remarks.

If you have additional questions, please email InvestorRelations at eHAB.com. Thank you again for joining today's call.

This concludes today's conference call. You may now disconnect. Have a good day.