Pennant Group Inc (PNTG) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Pennant Group Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference to your speaker today, Derek Bunker. Please go ahead, sir.

Thank you, Joelle. Welcome, everyone, and thank you for joining us today. Here with me today, I have Danny Walker, our CEO and President; Jen Freeman, our CFO; and John Gochnour, our COO.

Before we begin, I have a few housekeeping matters. We filed our earnings press release and 10-K 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 Friday, April 3, 2020. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, March 5, 2020, and these statements have not been nor will they be updated subsequent to 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, 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 wholly owned 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 in the service center are operated by separate, wholly owned 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 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 these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in yesterday's press release and is available on our 10-K.

With that, I'll turn the call over to Danny Walker, our CEO. Danny?

Good morning, everyone, and thank you for joining us today to discuss Pennant's Fourth Quarter and Full Year 2019 Results. The fourth quarter marked our first full quarter as a separate public company following our spin-off from our partners at the Ensign Group. Consistent with the first 3 quarters of 2019, in the fourth quarter we saw positive momentum throughout the organization as our local leaders executed within our innovated -- innovative operating model.

While we are pleased with our collective quarter and full year results, and we acknowledge and remain focused on what we must do to continue to realize the potential in our transitioning portfolio of senior housing facilities and continue the historical growth rate in our Home Health and Hospice portfolio. Both of our operating segments have significant upside potential, and we continue to work tirelessly to support our local operators as they face the opportunities and challenges in their respective local markets.

Turning to a few highlights. For the full year 2019, our Home Health and Hospice revenue posted a record year of almost $207 million. The growth, which represents -- this growth, which represents an increase of 22% over 2018 was driven by a 24% increase in total home health admissions, a 30% improvement in total hospice submissions and a 26% increase in hospice average daily census. These strong results were achieved while also successfully transitioning 9 home health hospice and home care operations, preparing for the implementation of the Patient-Driven Groupings Model or PDGM, and of course, navigating the challenges of a complex spin-off transaction.

As usual, our financial performance is driven by clinical quality. In 2019, our home health agencies significantly outperformed the national average and 60-day rehospitalization rates. Our average star ratings continued to improve and a greater percentage of our agencies than ever before achieved 4 or more stars in the CMS star rating structure.

January 1 saw the long expected implementation of PDGM. Although we have just 2 months of data available, the early indications are positive under the new payment program, and we feel comfortable that our modeling going into the payment -- the new payment system is holding up. We would -- we want to express our appreciation to our resource teams and our local clinical and operational leaders for their ongoing efforts to adjust to PDGM.

We are also excited to share that we have agreed to form a home health joint venture with Scripps Health, a leading nonprofit integrated health system based in San Diego, California. Following the closing of the transaction, which is expected to occur in the third quarter of 2020, one of our subsidiaries will manage the joint venture. Scripps was looking for a partner with proven results and was drawn to our locally focused operating model. San Diego is an attractive market for a partnership with an acute care provider, particularly given the deep Ensign's skilled nursing presence and the existence of the Ensign Pennant Care Continuum in the area.

While the joint venture model is one that has been used extensively in our industry and throughout health care, this transaction does not represent a pivot from our regular disciplined acquisition strategy. And we intend to carefully calibrate our joint venture model in San Diego before pursuing other similar opportunities. We will continue to -- our regular approach to acquisitions as well.

Turning to our Senior Living segment. We achieved full year 2019 segment revenue of $132 million or approximately a 13% increase over 2018. We are pleased to see this revenue growth and total occupancy increasing 70 basis points sequentially and year-over-year, and our average monthly revenue per occupied room increased 2.5% over 2018. While there were positive signs in our 2019 performance, there remains significant work to unlock the tremendous potential within our Senior Living portfolio.

Now I'd like to briefly address the developing situation with the spread of the coronavirus in the U.S., including within some of the markets in which we operate. We have been watching the developments closely since the first cases were identified in China. We have taken proactive steps to limit unnecessary travel and taken steps to enhance screening practices across the organization. And this is in addition to emphasizing the fundamentals of good infection control practices while working closely with the CDC and local health departments as the situation develops.

We continue to monitor the ongoing situation. We will make adjustments as needed to provide the best possible support for our clinical and operational teams as they continue to provide essential care in the communities they serve.

With that, I'll hand off -- hand it off to Derek to discuss some of our recent investment activities. Derek?

Thanks, Danny. 2019 was a busy year for us, even aside from the obvious work involved in the spin-off. In total, we acquired 11 operations across 5 states, 2 home health agencies, 5 hospice agencies, 2 home care agencies and 2 senior living communities. Fourth quarter was relatively slow as it occasionally occurs because of the ebb and flow of investment activity resulting from our disciplined leader-first acquisition strategy.

During the fourth quarter, after coming off an acquisition-heavy 3 quarters and completing the spin-off, more of our focus went on driving organic growth, deleveraging and paying off spin-off -- spin related expenses, continuing to transition our systems and processes off of Ensign and onto our own platform and infrastructure, preparing for PDGM and ramping up for potential acquisitions in 2020.

We are excited about our joint venture with Scripps Health. Partnering with Scripps, one of the largest and well-respected integrated health systems in Southern California is evidence that our operating model resonates with sophisticated health systems as well as with local single-site business owners. Additionally, so far in 2020, we've announced the acquisition of a home health agency in Clark County, Nevada. This acquisition is a great example of dozens of tuck-in acquisition opportunities we can target in communities we already serve.

Earlier this week, we closed on the acquisition of the Hospice of Missoula, a hospice agency based in Missoula, Montana, which has the capability to service communities across the state. Also since year-end, we acquired a 164-unit senior living community in Twin Falls, Idaho, representing an opportunity to expand our continuum in a state and community in which we already have a significant home health and hospice presence.

As we settle into 2020, we like where our dry powder, our leverage ratios and our deal pipeline stand. We expect to see additional opportunities from PDGM present themselves over the course of the year, and we believe our focus on preparing our leaders to carry the Pennant flag into new markets and territories and expand our offerings within our existing footprint will allow us to be an active buyer throughout the year.

And with that, I'll hand it over to Jen to provide more detail on the company's financial performance and guidance. Jen?

Thank you, Derek, and good morning, everyone. Detailed financial results for the year ended December 31, 2019, are contained in our 10-K and press release filed yesterday. We reported GAAP earnings per share of $0.11 for the full year ended December 31, 2019, and loss per share of $0.14 for the fourth quarter. Adjusted earnings per share is $0.61 for the year and $0.16 for the quarter, with approximately 94% of the adjustments on an annual basis pertaining to the exclusion of costs related to the spin-off transaction and share-based compensation.

As Danny mentioned earlier, we had significant success growing total revenue over the full year. Our full year 2019 non-GAAP revenue of $337.7 million came in just shy of our guidance. And our full year 2019 adjusted earnings per share of $0.61 came in higher than our guidance range, due primarily to a slower-than-anticipated ramp of general and administrative costs and lower interest expense with the pay down of the revolver during the quarter.

When adjusting the full year 2019 earnings per share for certain spin-related items in order to provide a more helpful year-over-year comparison to our full year 2020 guidance, our spin adjusted earnings per share of $0.48 came in slightly above our guidance of $0.45. Our key metrics include: full year 2019 cash generated from operations of $9.6 million, a lease-adjusted net debt to adjusted EBITDA ratio of 4.82x as of December 31, 2019, $10 million of our revolver paid down during the quarter, $52 million of availability on our line of credit as of March 3, 2020.

As we announced in our press release yesterday, we are not changing our 2020 guidance of annual adjusted earnings per share of $0.53 to $0.58 per diluted share and annual revenue of $376 million to $386 million. The midpoint of our earnings guidance represents an increase of 15.6% over the midpoint of our full year spin-adjusted 2019 earnings per share. The 2020 guidance is based upon diluted weighted average common shares outstanding of approximately $30 million, an effective tax rate of 26.4%, the inclusion of acquisitions closed year-to-date, the exclusion of costs related to start-up operations, the exclusion of acquisition-related costs, the exclusion of redundant or nonrecurring expenses related to spin-off transition services and the exclusion of stock-based compensation.

As a reminder, we continue our transition to a fully self-sufficient publicly traded company. While many systems and processes were transitioned simultaneously with the spin-off, our guidance assumes elevated general and administrative expenses resulting from the remaining work to complete the separation from Ensign systems and build internal capabilities and capacity.

And with that, I'll turn the call back over to Danny. Danny?

Thank you, Jen. Before we go to the Q&A portion, I'd like to just recognize a few of our local teams that have achieved outstanding results. And I share these examples as being illustrative of the potential that exists in our portfolios. Led by Executive Director, Bridger Booras; and the Directors of Clinical Services, Sue Hepworth and Debra Martinez, Horizon Home Health and Hospice based in Boise, Idaho, which was our first home health and hospice acquisition, has consistently achieved strong results for almost a decade even through challenging reimbursement and regulatory changes.

With extraordinary employee engagement, community leading nursing and therapy programs and strong clinical outcomes, Horizon has become a provider of choice for payers and health systems across southwestern Idaho. As is consistently the case across our platform, Horizon's strong culture and clinical performance has driven strong financial results. In the 8 years following acquisition, Horizon achieved a compound annual growth rate of 18% and -- on revenue, and an earnings compound annual growth rate of 17% across its first 8 years. In 2019, top and bottom line growth continued, and the margin expanded as Horizon posted 7% revenue growth and an 18% EBIT growth over the prior year.

Another shining example is in our Senior Living business at Rose Court Assisted Living & Memory Care in Phoenix, Arizona, led by Executive Director, Carolyn Lynch; and Wellness Director, [Tristis] Patrick, Rose Court has become a community of choice in its area by establishing a culture that thrives on shared ownership, accountability and dedicated service. In addition to lowering employee turnover and increasing resident satisfaction, Rose Court achieved a deficiency-free survey, while also selflessly contributing to the overall strength of its partner communities in Arizona.

Rose Court saw full year revenue increase by 15% over the prior year, and fourth quarter revenue increased 18% over the prior year quarter. And earnings before -- earnings increased 25% over 2018, which was in itself, an increase of 23% over 2017. This just illustrates the upside potential that exists in our senior living portfolio. It's thanks to the tireless efforts of these local leaders and hundreds more across the organization that The Pennant Group is positioned for success in 2020 and the future.

We celebrate 2019 for the wins we've achieved and more -- are more motivated than ever to continue to improve. From experience, we know that these improvements don't happen overnight, but we are confident that as we achieve -- that we can achieve superior results through the consistent and rigorous application of our operating model over time.

Now we will turn to the Q&A portion of our call. Just as a note, we do have our COO, John Gochnour, available here to answer questions. With that, Joelle, could you please instruct the audience on the Q&A procedure?

(Operator Instructions) Our first question comes from Frank Morgan with RBC Capital Markets.

I was hoping to get a little more color on the cost that you talked about, the leadership systems and business alignment changes in the Senior Living segment. Kind of maybe more color on what that is and how long does that carry over into 2020, first question.

Yes. Yes, so it's an ongoing process. We've had to realign the -- each of those segments related to where they -- how they cluster. Our biggest challenges have been in Texas, Frank. And then to a lesser degree, as we realign the relationships in California, we've continued to have some challenges related to just getting everybody settled in with their new cluster partners and leadership, our basic patterns of leadership taking root. So how long that continues to last? We feel like it's already beginning to improve. This is a major focus for us right now.

Got you. And I guess, we'll stay more on the operational side for now. Going back to the corona preparation, good color there. But I'm just curious, when I think about your 2 business segments, would you say 1 of those 2 segments is sort of more at risk, if you will, to dealing with this virus? And is it more of a worker issue? Or is it more of a -- is it a patient issue? Maybe how it varies between the 2 sides of your 2 segments.

Great question, Frank. So it is significant, right, in both businesses, but the way the issues would present themselves are unique. In the senior housing setting, you run the risk that you could have an outbreak kind of situation. We don't anticipate that happening, and we're taking all the appropriate measures to prevent that from occurring. That involves screening of visitors that come in and out of the facility. Of course, all of the appropriate infection control procedures and quarantining as necessary. You also have to think carefully about the staff. In some instances, staff work across -- in different communities, sometimes outside of our own businesses.

They'll have a second shift down the street. So we've implemented a careful procedures related to screening of staff and making sure that we're keeping them safe as well. So the Senior Living, I would say, has the greater risk associated with this type of situation.

Our approach to it has been to largely mirror the procedures that are being adopted by CMS in the skilled nursing setting. We've really just kind of taken our cues from there. On the home health and hospice arena, obviously, in the hospice space, you can have our staff going into the skilled nursing environment and hospital systems to provide care. And so we've taken steps to prepare them to be able to satisfy all of the ongoing changes in requirements related to infect control there, making sure that we're putting them in a position to succeed.

You -- on the home health side of things and the home care side of things, you deal with largely individuals being quarantined in their own homes as necessary, but it's identification, and we've implemented travel screening questionnaire so every patient that we had met, we have a sense of where they've been. And our systems are built to be able to do this kind of thing. Our concern primarily resides around the well-being of our patients and the residents in our communities and our staff. And so we've acted out of an abundance of caution. Our response has been ongoing and will continue to do so.

Got you. And obviously, you've made progress on acquisitions in, I guess, Twin Falls on the Senior Living side, and then you've announced this JV opportunity coming up with Scripps. Does -- how do you think about the year in terms of where the most opportunities would be? Obviously, home health care, I guess, there -- maybe there are some opportunities because of the PDGM but if you're -- how do you think about the year ahead in terms of where you think the most opportunities or where capital is most likely to be deployed?

Yes. So we've told everyone that we're pretty agnostic about that. But in addition to that, we will want to put capital to work where we can get the right kind of return. We see a lot of opportunity for improvement in our senior housing portfolio. And so we don't expect a lot of capital to be going towards senior housing this year. We need to see that we can help that team transition and really gain their footing as a separate entity inside of Pennant. And we're very optimistic about where they're at, but don't see -- we would see certain pockets where there's opportunities for growth, and we would pursue those.

But the majority of our growth, we would expect to be in the home health and hospice arena based on where our strongest performance is coming from, and we'll invest where our strength is. So the takeaway from that is we continue to be very, very focused on helping our Senior Living team transition effectively and realize the potential that exists in the portfolio. And our Home Health and Hospice operators have quite a bit of momentum. And as opportunities present themselves driven by PDGM or just normal market conditions, we will be very active in that space.

Got you. One more and I'll hop back in the queue. The hospice acquisition that you announced, the Missoula, do you have any color around the size of that, like an ADC that you could share with us?

Yes, Frank, it's a relatively small agency with an ADC in the 30 to 40 range. It's a really unique opportunity for us to enter the state of Montana. It's got a very strong clinical team and the way licensing works there offers opportunity for expansion to other communities around the state. We've got a great leader who slated to head up there, who's well-known in the community, has spent a long time there and is experienced with us and has operated for us before. So we're very -- we're excited about that opportunity.

Got you. And then just the Scripps JV, is that in the guidance or not? The -- it's not -- it doesn't close until the third quarter, but is that in the guidance?

No, it's not at this point.

(Operator Instructions) I'm not showing any further questions at this time. I would now like to turn the call back over to Danny Walker for any further remarks.

Well, we'd like to thank you all for joining us. We're grateful for the opportunity to report on our efforts to those that are interested in our success, and we appreciate all of our operators for all the good that they are doing and look forward to the year ahead. And thank you all for joining us.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.