Good morning, everyone, and welcome to Enhabit Home Health & Hospice's First Quarter 2024 Earnings Conference Call. [Operator Instructions]. 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 Crissy Carlisle, Enhabits' Chief Financial Officer. Crissy, 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 and related Form 8-K filed with the SEC are available on our website at investors.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 risks 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 10-K, 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, Crissy. 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 G&A 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 Nurse' 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. Enhabits' high-quality outcomes are a result of our employees' hard work and I'm proud of our entire team. In our Home Health segment, we are focused on achieving growth through 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 fee-for-service Medicare mix. While year-over-year fee-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 emissions out of historically lower paying contracts to these new contracts at improved rates. Contracts that acknowledge the high-quality care we provide to the payers members. Admissions in our historically lower paying contracts declined from 42% of our total admissions in quarter 1, 2023 to 29% in quarter 1 this year. As these 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 mix shift 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 our spin-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 mix shift 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 mix shift, 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 mix shift and increased cost of service were offset by a reduction in general and administrative expenses. Cost per visit…

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 advisers, 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 our transaction. We believe this is largely due to macro headwinds, including, among other things, uncertain regulatory developments including Medicare reimbursement policies throughout the health care industry and an evolving anti-trust landscape, a difficult health care and operating environment and persistently high interest rates. Considering this and other strategic alternatives reviewed with the advisers during the review process, the Board determined the best way to enhance shareholder value at this time is to continue to operate as a stand-alone 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 value. 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.

[Operator Instructions] Our first question comes from A.J. Rice at UBS.

Maybe on the cost per visit increase, obviously, a 2% to 3% increases 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 business per episode were slightly down 1/10 of a day. It would look like looking at the peers that maybe you've got some more room there. But 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?

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

And 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 piloting within those 17 branches means rolling it out and then also spending time with the dashboard to make sure that the leaders are using the visit utilization recommendations, again, to go from lower intensity to higher intensity needs for patients. So we know that we still have opportunity as it relates to managing business per episode, this is 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 they may provision which is lower margins. So 2 business -- 2 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?

Yes. So I think you're -- when we think about Medicare and non-Medicare reporting, one, we believe it's 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 prevent to get that non-Medicare number includes episodic, you still have the information you need to get really close to -- here's why non-Medicare revenue, here's my total visits. 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 preventing it, given that you're not trying to model 3 different sets, as you've got these 2 just traditional Medicare and non-Medicare.

Our next question comes from the line of A.J. Rice with UBS.

A.J. was just on operator.

I'm sorry about that. The next call comes from the line of Jason Cassorla with Citi.

Great. Maybe just a follow-up on A.J. 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 nonpayer 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 inside the non-Medicare would be great to start.

Yes. 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 other 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% discount, and that is far better than the 35% to 40% discounts that we have historically seen before we had our payer innovation team.

Okay. Fair enough. Maybe just on the -- there's a follow-up here, just on the Medicare episode declines. You've discussed in the past that the lack of MA contracting was a gating factor with referral sources. I mean, I guess maybe what's the update there? Is there increased momentum coming out of that national contract that began already 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 kind of that quarter 3, quarter 4, quarter 1, 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 just started gearing up the new national MA. 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.

Our next question comes from the line of Brian Tanquilut with Jefferies.

It's Jack Slevin on for Brian. I 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 are 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, Crissy, maybe just thinking about the balance sheet 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 multiyear look?

Yes, sure. So stabilization of EBITDA and the required amortization of the term loan are expected to help us to continue to delever in 2024. 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 revolver. I want to remind everyone that we have only drawn on that revolver of once in the fourth quarter of 2022 when we had over $50 million of stacked payment 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. We consider $2 million or $3 million of that free cash flow for de novo. And then the priority, of course, would be to use the rest for debt reduction.

Our next question comes from the line of Joanna Gajuk with Bank of America.

So I guess the follow-up here on your guidance, right? So how was the quarter versus your internal? You said you kept your guidance. The range is pretty wide. So any update on your 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, Joanna. As we've mentioned previously, we think we're starting the year in a much better sense with those 2 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 contracts and then just Hospice patient days growth. And 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 follow on the eye 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 CEO portion of our staff based off the success that we've had with recruitment and retention of our clinical change, we've been reporting over 100 net new nursing hires for several consecutive quarters now. And so again, we feel good about our ability to change that trend going forward, and that will have a moderate EBITDA build throughout the year.

Great. And if I may, also a follow-up, I guess, or maybe new, but around your innovation plans or the contracts. So when you negotiate these rates, I guess, to 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 these per visit contracts. So first of all, like, is that the case are you trying to do that, too? And if you do, what kind of, I guess, rate increases are you getting if at all? And then when you do that, are you also trying to get a relief on the utilization management as in increasing the number of business that authorized by these MA plans. And then I guess somebody was trying to ask a question like how much essentially the pricing is improving on these low-paying contracts?

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 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 a 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 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 contract, we can be a little bit more firm with the legacy ones.

Our next question comes from the line of Ryan Langston with TD Cowen.

Sounds like the candidate and nursing pool is, I think, Barb, you might have said up 30%, which is good. I guess, how to think about other types of clinical support 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 need to add some therapy physicians. Overall, we did 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 pools around the area. So those areas are the 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 it 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. Crissy, 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?

Yes. While change is not our primary clearing house, 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 set 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 build 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 and expect to see some movement on that in the coming quarters.

I will now turn the call back over to Crissy Carlisle for some closing remarks.

If you have additional questions, please e-mail investorrelations@ehab.com. Thank you again for joining today's call.

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