Digi International Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 29, 2024

There are 6 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Pennant Group 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Curt Cheney. Please go ahead.

Speaker 1

Thank you, Daniel. Welcome, everyone, and thank you for joining us today. Here with me today, I have Brent Guarasoli, our CEO Don Goughner, our President and COO and Lynette Waldom, our CFO. Before we begin, I have a few housekeeping matters. We filed our earnings press release and 10 ks yesterday.

Speaker 1

This announcement is available on the Investor Relations section of our website at ww ww.pennantgroup.com. A replay of this call will also be available on our website until 5 pm Mountain on February 29, 2025. All statements made on this call are as of today, February 29, 2024, and will not be updated after the call. Also, any forward looking statements made today are based on management's current expectations and assumptions 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.

Speaker 1

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 for new information, future events, changing circumstances or for any other reason. In addition, The Pennant Group Inc. Is a holding company with no direct operating assets, employees or revenues. Certain of our independent subsidiaries collectively referred to as a 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.

Speaker 1

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 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, are in similar terms do not imply that Pennant Group Inc. Has direct operating assets, employees or revenue or that any of the subsidiaries are operated by the Pennant Group.

Speaker 1

Also, we supplement our GAAP reporting with non GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, They should not be relied upon to the exclusion of GAAP reports. A GAAP to non GAAP reconciliation is available in yesterday's press release and is available in our 10 ks. And with that, I'll turn it over to Brent Giarasoli, our CEO. Brent?

Speaker 2

Thanks, Kirk, and welcome everyone to our Q4 and full year 2023 earnings call. Before we share results, I want to express deep appreciation to the local leaders and teams who care for our patients and residents across our platform every day. Your compassion and dedication are the bedrock of Pennant's clinical and financial success. We are grateful to work alongside you and partner with you in providing life changing service. We are pleased to announce strong Q4 results to cap off a year of consistent progress and steady growth.

Speaker 2

In Q4, we generated adjusted earnings per share of 0.22 dollars bringing full year 2023 adjusted earnings per share to $0.73 This exceeds our earnings guidance midpoint of $0.72 which we raised in our last earnings call. Collectively, our full year consolidated results reflect revenue of 544 $900,000 an increase of $71,700,000 or 15.1 percent over the prior year and adjusted EBITDA of $40,700,000 an improvement of $9,200,000 or 29.1 percent over the prior year. During 2023, our consolidated EBITDA margin increased 80 basis points to 7.6% from 6.8%. In short, we delivered on our commitments in 2023. These results were achieved by focusing on 5 key areas: leadership development, clinical excellence, employee experience, margin improvement and growth.

Speaker 2

As we've outlined on prior quarterly calls, we saw progress in each of these areas throughout the year and our positive financial results are the outcome of these efforts. No priority has been more important to our success than leadership development. We are pleased with the progress we made in this area in 2023. During the year, we added over 50 CEOs in training or CITs and 38 local leaders earned C level designations in their operations, including 11 local CEOs. As we've explained before, CEOs and other C level leaders earn this designation by acting as true owners and creating significant financial, clinical and cultural value.

Speaker 2

We have found that CEOs typically generate roughly $1,000,000 more in annual earnings than our non CEO Executive Directors. In conjunction with better clinical and cultural outcomes, these most recent C level recipients, along with our current C level leaders and new CITs, will be the foundation of our success moving forward and their contributions are reflected in our 2023 results. Clinical excellence is at the heart of everything we do and clinical leadership development is a major focus. Just as we continue to train and elevate operational leaders to become CEOs, we are making similar investments in future clinical leaders to help create chief clinical, therapy and wellness officers in local operations. Our clinical onboarding, training and development programs were strengthened and enhanced in 2023 and 16 clinical leaders were elevated to C level status, which is driving excellent quality outcomes as well as patient and resident satisfaction.

Speaker 2

In addition to leadership development and clinical excellence, I'd like to provide some data points that highlight the progress we've made in the other three focus areas. We made great strides in our employee engagement and recruiting during the year as demonstrated by double digit improvement in our turnover rate. And with additional hires in the 1st 2 months of 2024, we have now surpassed 6,000 employees, a double digit increase over year end 2022. On the margin front, our consolidated our adjusted consolidated EBITDA margin improved 80 basis points year over year. And from a growth perspective, our 2023 revenue increased a robust 71,700,000 dollars approximately 3 quarters of which was organic same store growth.

Speaker 2

As we announced in our press release yesterday, we are providing guidance for the full year of 2024. We anticipate full year revenue in the range of $596,800,000 to $633,700,000 and adjusted earnings per share in the range of $0.82 to $0.91 The midpoint of $0.87 represents 19.2% growth on our 2023 adjusted earnings and 52.6% growth over our 2022 results. Our 2024 guidance is based on the compelling momentum in both our segments, the readiness of our local leaders to drive organic and inorganic growth and the latent potential that remains in our existing operations. We look forward to another year of strong performance and growth in 2024. With that, I'll turn the call over to John to provide more detail on our operational results.

Speaker 3

Thank you, Brent, and good morning, everyone. In 2023, our local teams distinguished themselves as key partners in their healthcare communities, driving exceptional top line growth and improved earnings in both of our operating segments. Our 4th quarter results highlighted this progress and also the considerable potential for improvement as we resolutely focus on our operational fundamentals. Turning first to Home Health and Hospice. Segment revenue of $106,900,000 increased 16,200,000 dollars or 17.9 percent over the prior year quarter.

Speaker 3

This growth was a result of continued momentum in our hospice business, where a 17.8% increase in hospice ADC, a 13.1% increase in hospice admissions and continued normalization in our length of stay resulted in revenue growth of $11,600,000 or 27.1 percent over the prior year quarter. Our Home Health platform also continued its steady growth as Home Health revenue increased by $4,000,000 or 9.6%. Total home health admissions rose 12.8 percent and Medicare home health admissions rose 5.6% each over the prior year quarter. Along with strong Medicare growth, we also continued to build upon our managed care relationships and negotiate new and more favorable contracts. These contracts and improved rates increased our ability to take managed care volume, resulting in an 11.3% increase in managed care visits and a 13.4% increase in managed care revenue per visit each over the prior year quarter.

Speaker 3

Home Health and Hospice adjusted EBITDA of $16,700,000 increased $1,100,000 or 7.3 percent over the prior year quarter. In the last half of the year, we have acquired or started 8 new locations across the segment. As we have discussed before, because we often acquire underperforming operations, a heavy volume of acquisitions can contribute to some lumpiness and margin pressure in our quarterly results, but also provides compelling long term growth opportunity. As we continue to integrate these new agencies and build the cultural, clinical and financial foundation for sustained success, we are well positioned to produce strong bottom line results in 2024. Our clinical results remain the foundation of our success.

Speaker 3

Our local teams maintain their focus on delivering best in class clinical outcomes, while effectively managing utilization and expense. As part of the expansion of CMS' home health value based purchasing program, we are carefully tracking and managing performance against the value based purchasing criteria. Based on initial data, we are well positioned to capture positive financial incentives that the program creates to reward providers who deliver exceptional value and clinical outcomes. Our senior living business continued its dramatic improvement. The business has stabilized and begun to grow with meaningful potential yet unrealized.

Speaker 3

Exiting the pandemic, we have invested significant time and attention to recruit and develop strong senior living leaders committed to our culture and model. These investments have led to robust top and bottom line improvement. Adjusting for divested buildings, same store senior living segment revenue was $148,200,000 an increase of 21,400,000 dollars or 16.9 percent over the prior year and $38,700,000 in the 4th quarter, a 5,200,000 dollars or 15.7 percent increase over the prior year quarter. Full year senior living segment adjusted EBITDA was 12,300,000 dollars a $6,300,000 or 105 percent increase over the prior year and $3,400,000 for the 4th quarter, an increase of $1,400,000 or 69 percent over the prior year quarter. Occupancy reached a new post pandemic high of 79%, even as average monthly revenue per occupied room for the 4th quarter rose to $4,093 an increase of $423 or 11.5 percent over the prior year quarter.

Speaker 3

Turning to growth. We remain focused on our disciplined strategy of acquiring operations at attractive valuations in locations where we have strong peer operating clusters and talented leaders ready to drive results. Consistent with that strategy, we executed a steady stream of sweet spot acquisitions during the second half of twenty twenty three, including the hospice acquisitions in Arizona, Texas and Oklahoma we discussed in last quarter's call. In December, we acquired another such operation, Southwestern Palliative Care and Hospice in Yuma, Arizona, creating a unique opportunity to serve our rural population center. We are excited that several of these acquisitions create new opportunities to serve residents of rural communities in our existing states.

Speaker 3

Our historical strength in operating in rural areas demonstrates the unique advantage of our operating model, where decisions driven by local leaders meet the needs of their patients and community partners. Each of these transitions is off to a great start in our model with talented local leadership teams driving strong clinical and financial improvement and growth momentum out of the gate. We look forward to unlocking the tremendous potential of these acquisitions as they mature over the next few quarters. On January 1, 2024, we established a new home health joint venture with John Muir Health, a leading integrated health system in Northern California. In this venture, a local Pennant affiliated operating subsidiary will manage and majority own Neewer Home Health, a new home health agency that will serve the East Bay Area.

Speaker 3

Like our partnership with Scripps Health, this venture places us on the forefront of true care continuum development, helping support effective transitions of care between the acute setting and the home and harnessing our home health expertise to improve clinical and financial outcomes. We are excited to innovate with the new talented team at Muir Home Health and our partners at John Muir Health. While creating a new home health joint venture is a complex endeavor, the deep expertise of our strong operational team positions us for success in establishing Muir as a key solution for the Bay Area Healthcare Continuum. With that, I'll hand it over to Lynette for a review of the financials. Lynette?

Speaker 4

Thank you, John, and good morning, everyone. Detailed financial results for the full year quarter ended December 31, 2023 are contained in our 10 ks and press release filed yesterday. For the full year ended December 31, 2023, we reported total GAAP revenue of $544,900,000 an increase of $71,700,000 or 15.1 percent over the prior year and adjusted EBITDA of $40,700,000 a $9,200,000 or 29.1 percent increase over the prior year. We also reported GAAP diluted earnings per share of $0.44 and non GAAP adjusted earnings per diluted share of $0.73 an increase of 28.1 percent over the prior year. With these results, we met or exceeded updated guidance on our annual basis.

Speaker 4

Key metrics for the full year and quarter ended December 31, 2023 include $69,200,000 drawn on our revolving line of credit and $6,100,000 in cash on hand at quarter end, a 1.44 times net debt to adjusted EBITDA and cash flows provided from operations of $33,100,000 for the year. As we mentioned in our press release, we are providing full year 2024 guidance of revenue of $596,800,000 to 633,700,000 dollars adjusted EBITDA of $46,200,000 to $49,700,000 and adjusted earnings per share of $0.82 to $0.91 Our guidance incorporates current operations and organic growth, diluted weighted average shares outstanding of approximately 30,400,000 and a 26% effective tax rate. Our 2024 annual guidance anticipates an EPS increase quarter over quarter consistent with our 2023 performance and is based on a ramp in home health and hospice ADC, continued occupancy improvement in senior living, anticipated reimbursement rate adjustments, elevated interest rates and continued inflationary pressures, which we see lingering into 2024. It does not include unannounced acquisitions and excludes start up operations, share based compensation, acquisitions related costs and one time implementation and unusual items. Our guidance does include expected revenue from Muir Home from the Muir Home Health joint venture, but recognizing the startup nature of that operation assumes that earnings will ramp throughout the year resulting in a net zero contribution to earnings in 2024.

Speaker 4

We expect cash flow from operations for 2024 to reflect organic revenue growth and bottom line improvement. With increased earnings, continued effective cash collections and lower capital expenditures, we expect to strengthen our balance sheet and fund future growth. And with that, I'll hand it back to Brent to highlight a couple of our local leaders.

Speaker 2

Thanks, Lynette. It's my pleasure to spotlight 2 operations that achieved exceptional results in 2023. Their stories demonstrate the remarkable progress that can occur when local leaders behave as owners and become C level leaders in their operations. First, I'd like to highlight Alpha Home Health and Hospice in Everett, Washington. Led by future CEO, George Gittungo New Hospice Chief Clinical Officer, Courtney Petrie Home Health Clinical Director, Cindy Kral and Chief Rehab Officer, Travis Arenzi, Alpha's leaders have set a compelling vision to meet the unique needs of their community and establish themselves as a premier home health and hospice provider.

Speaker 2

By rallying around that vision, Afla has created a winning culture and continued to deepen their partnerships and impact on the community. Their hard work, dedication and collaboration are apparent in their results, including strong employee satisfaction, exceptionally low turnover, a 5 star home health quality score and an 11.4% rehospitalization rate versus the national average of 14.1%. Financial results have followed with a 49.6 percent year over year EBIT increase on a 30.4% increase in revenue. In Orange County, California, future CEO, Ron Hipolito future CMO, Elizabeth Brand Mendoza and Future CWO, Ruby Rakamagao have led Main Place Senior Living to remarkable success. Like it did to so many communities, the pandemic took a toll on Main Place throughout 2020 2021.

Speaker 2

Ron and team stepped into Main Place in 20 22 and improved all aspects of their community, beginning with the culture and the resident and employee experience. Because of their efforts, Main Place is now a community of choice in Orange County. Year over year occupancy has risen from 70% to 91%, revenue per occupied room has increased 28% and EBIT is 6x greater than it was in 2022. With that, we'll open it up for questions. Daniel, can you please instruct the audience on the Q and A procedure?

Operator

Thank you. Our first question comes from Dean Sublett with Stephens. Your line is now open.

Speaker 5

Hey, good morning. This is Dean on for Scott. So in the release, you speak to the total revenue ramp throughout the year, but we just wanted to see if you could break down how you're thinking about top line growth rates across each of home health, hospice and senior living? And then how are you thinking about year over year margin trends at the segment level?

Speaker 4

Thanks, Dean, for your question. On a for our revenue growth front for our 2024 guidance for existing home health and hospice operations, we look at our growth in our existing and same store operations and then also our new store acquisitional operations. With same store growth, we expect that to be in the high single digits and new store growth in the low to mid double digits with a blended rate in the low double digits. As we look at our senior living operations, revenue is impacted by both occupancy increases and resplore And those were both factored in with occupancy increases similar to increases in 2023 and our RevPOR increases in the mid single digits. We also continue to focus on increasing occupancy in our pre pandemic levels to be closer to our pre pandemic levels of 81.5%.

Speaker 4

On the margin front, we have factored in a ramp of our targeted margins on a home health and hospice acquisitions. And with that, there's a drag that occurs with those acquisitionals, Those acquisitions, because we take on potentially underperforming operations and transition them to our system and operating model. We continue to also have some labor pressure and inflationary concerns, which have lessened through 2023, but still expect that to continue into 2024. On the senior living front, we have included adjusted EBITDA improvements through cost control and operational efficiency and margin gains as we drive occupancy. So as that occupancy increases, we feel that there's some operational efficiencies there.

Speaker 4

And with those, we expect approximately a 1% increase in our margin or EBITDA expansion in both of those operations.

Speaker 2

Yes. And Deane, I would just add, one of the things that we're really excited about was the significant growth that we experienced in 2023. And we've done a lot of these acquisitions near the end of the year. And so on the margin front, there's a ton of opportunity for us to take that revenue growth that we added and put it to the bottom line. And so from estimate standpoint, we're fairly conservative in where we think we can end up by the end of the year in our guidance.

Speaker 2

But there's certainly significant potential there to continue to drive those improvements as we go forward from the beginning of the year through the end of the year.

Speaker 5

Okay, great. That's helpful. And just a couple more from us. I might have missed it in there, but just anything to call out on how you're thinking about rate growth for senior living in 2024? And just lastly, I think you alluded to it earlier, but anything else to call out for operating cash flow and CapEx as we think about the full year?

Speaker 5

Thanks.

Speaker 2

Yes. On the rate growth I mean, we were double digit rate growth again in 2023, which was great, right? And that's due in large part to the investments that we've made into the buildings, the improvements that we've made from a leadership standpoint and just creating a better offering overall. So we're pretty excited about what we saw. We haven't factored in that high level of rate growth.

Speaker 2

We're probably about half of that. That's what our expectation is. And keep in mind, there's really a couple of different levers that we can pull, right? One is just the rents, right? And we pretty much across the board would expect rate increases at all of our communities.

Speaker 2

And so I would say that probably represents a good half of where we're going to see some of that rate growth. And then on the other front is on the CARES charges or the direct cost or the direct CARES that we're providing. And so that we've talked about this, I think in past calls as well. There's a significant opportunity to continue to elevate, whether that's through improved assessments and just ensuring that we're getting rewarded for the cares that we're providing. And so by pulling both of those levers, we think we're going to continue to see significant and healthy rate growth, but just not quite at the same level that we saw in 2023.

Speaker 2

And then, Lynette, you want to talk about then on the cash flows?

Speaker 4

Yes. On the cash flow front, we're expecting operating cash flows to be in the range of $30,000,000 to 35,000,000 dollars on the operating cash flow front. And then CapEx to be in line with spend that we had for this year, which was about $8,000,000 a little over $8,000,000

Speaker 5

Great. Thanks so much.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Brent Giurisoli for closing remarks.

Speaker 2

Okay. Well, thank you, Daniel, and thank you everyone for joining us today. We hope you have a great rest of your

Operator

day. This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Digi International Q4 2023
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