Thank you for standing by. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ensign Q4 2023 Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr. Keetch. Please go ahead.

Thank you, operator, and welcome, everyone. We filed our earnings press release yesterday, and it is available on the Investor Relations section of our website at ensigngroup.net. A replay of this call will also be available on our website until 5:00 p.m. Pacific on Friday, March 1, 2024. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, February 2, 2024, and these statements have not been nor will 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, Ensign and its independent subsidiaries 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 Ensign 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 independent subsidiaries through contractual relationships with such subsidiaries. In addition, our captive insurance subsidiary, which we refer to as the insurance captive, provides certain claims-made coverage to our operating companies for general and professional liability as well as for workers' compensation insurance liabilities. Ensign also owns…

Thank you, Chad, and thank you everyone for joining us today. Our local teams have once again posted impressive clinical and financial results and continue to build remarkable momentum in each market across our portfolio. Our success is entirely due to the efforts and commitment of those leadership teams, caregivers, field resources and service center partners. One of our most important priorities is to support those that care for our patients every day. After another record quarter, we're excited about the many opportunities to continue to capture the enormous potential inherent in our portfolio as we relentlessly focus on our operational fundamentals, both in existing operations and the growing number of new acquisitions. We are pleased to see same-store occupancy of 79.9%, which grew by 240 basis points over the prior year quarter. In addition, we saw an improvement in occupancy on a sequential basis of 40 basis points over the third quarter. We saw increased volume in our combined same-store and transitioning managed care revenue and managed care census, which increased during the quarter by 12.3% and 3.5%, respectively, over the prior year quarter as a result of strengthened relationships with our managed care partners and quality outcomes. As expected, we saw an increase in our skilled mix during the quarter as our same-store days for the quarter increased by 110 basis points sequentially over the third quarter. We are encouraged by the continued strength in our skilled mix as it demonstrates the continuously increasing demand for skilled post-acute services. By applying proven cultural and operational principles, our local leaders continue to retain and recruit high caliber individuals, which then go on to achieve tremendous success across our growing footprint. We continue to be encouraged by the reduction in our use of third-party nursing agencies, which improved again for…

Thank you, Barry. We are very excited about the three new operations and one real estate asset we added during the quarter and since, bringing the number of operations acquired since 2022 to 54. These new operations include a healthcare campus in Houston, Texas, which included the real estate assets that were acquired by Standard Bearer, one operation in Kansas, one operation in Nevada and our First Campus in Tennessee, totaling an additional 528 new operational beds. These additions were all carefully selected amongst the many opportunities available to us and were chosen because of the huge clinical and financial potential. Following our recent SNF growth in 2023, occupancy and skilled mix days for the skilled nursing operations in the recently acquired bucket were 77.6% and 27.5%, respectively, for the quarter. When compared to our same-store occupancy and skilled mix days of 79.9% and 30.9%, respectively, there is enormous upside in each of these new operations, as they continue to transform into same-store caliber operations. We also remind you that there is nothing about the designation of same-store within our three buckets that should be seen as a cap on the occupancies that our more mature operations can achieve. Our leaders consistently drive remarkable improvement in our most mature assets, many of which achieve and maintain occupancies well under the 90% plus range as they seek and deliver on opportunities to expand their clinical capabilities into new functional areas and provide alternatives to long hospital stays. We are very optimistic about the organic growth potential within our existing portfolio, including our new acquisitions. Because Tennessee is our first new state in several years, I thought I would just briefly highlight our new market program. As most of you know, the foundational principle of our entire strategy is the recognition that…

Thank you, Chad, and hello everyone. As was mentioned earlier, the continued success we experienced during the fourth quarter was a result of continued improvement in occupancy and staffing, combined with hundreds of small but meaningful innovations by facility leaders and clusters. Today, I'd like to share two examples that demonstrate how diverse geographies and business lines are maturing and in turn providing more and more opportunities for growth and expansion as we enter 2024. The first facility highlight is The Healthcare Resort of Topeka Campus. This 94 bed skilled nursing and senior living campus has consistently grown since opening in 2016. While the facility has maintained a high census and been successful for many years, going into 2023, CEO, Ben Leiker and Director of Nursing, Amanda Perron, together with their interdisciplinary team, developed a strategy to take performance to the next level, by leveraging their reputation and the stability in nurse staffing to improve skilled mix in the SNF and improve revenue quality in their senior living. The strategy involves concerted efforts to develop clinical programs that met their local hospitals discharge needs, as well as strengthening partnerships with key managed care plans and conveners. As a result, the senior living section of the campus maintained 100% occupancy for all of 2023 and the campus grew revenues by 13.4% over prior year quarter. During that same period, skilled mix days improved by 17%, driven specifically by an increase in managed care days of more than 40%. This growth in acuity was accompanied by an equal focus on recruiting and retention, which led to one of the lowest turnover rates in the market and zero agency staffing during all of 2023. The stability in staffing resulted in great regulatory performance, including no survey deficiencies and allowed the facility to avoid…

Thanks, Spencer, and good morning, everyone. Detailed financials for the year and the quarter are contained in our 10-K and press release filed yesterday. Some additional highlights for the year include consolidated GAAP revenues and adjusted revenues were both $3.73 billion, an increase of 23%. GAAP diluted earnings per share was $3.65 and GAAP net income was $209.4 million. Adjusted diluted earnings per share was $4.77, an increase of 15.2% and adjusted net income was $273.5 million, an increase of 16%. Highlights for the quarter include consolidated GAAP revenues and adjusted earnings were both $980.4 million, an increase of 21%. GAAP diluted earnings per share was $0.38 and GAAP net income was $21.7 million. Adjusted diluted earnings per share was $1.28, an increase of 16.4% and adjusted net income was $73.7 million, an increase of 17.5%. Other key metrics as of December 31, 2023 include: Cash and cash equivalents of $509.6 million and cash flow from operations of $376.7 million. We continue to delever our portfolio, achieving a lease adjusted net debt-to-EBITDA ratio of 1.98x, which is particularly noteworthy given the amount of growth we have taken on over this last year. In addition, we currently have over $593 million of available capacity on our line of credit, which when combined with our cash on our balance sheet, give us over $1 billion of dry powder and future investments. We also own 113 assets, of which 108 are held by Standard Bearer and 89 of which are owned completely debt free and continue to gain significant value over time, adding even more liquidity to help our future growth. During the quarter, we increased our quarterly cash dividend to $0.06 per share, marking the twenty-first consecutive annual dividend increase. Given our strength, we plan to continue our 22-year history of paying…

Thanks, Suzanne. As we to wrap up, I can't emphasize enough how incredibly honored and grateful we are to work alongside our facility leaders, field resources, clinical partners and service center team that are behind these record setting results. We never cease to be amazed by their impressive resiliency as they focus on supporting one another in new and innovative ways. Their commitment has blessed the lives of so many including our own. We're excited about our future because of our amazing partners and we have complete faith in them and the culture that they have collectively built. We'll now turn over to the Q&A portion of our call. Operator, can you please instruct the audience on the Q&A procedure.

[Operator Instructions] Our first question comes from the line of Ben Hendrix with RBC Capital Markets.

Suzanne, I was hoping you could follow-up on some of your comments on the top-line guidance, really good revenue outlook there. And we're just wondering if we could kind of break down a little bit more of the drivers there. For example, what you're thinking about in terms of how of occupancy phases through the year? Also you mentioned the rate backdrop and strong Medicaid reimbursement. Just want to kind of see what you're seeing there and how sustainable that is in the next couple of years? And then just any commentary on contribution from recent acquisitions that we could see ramp-up this year?

Thanks, Ben. It's a great question. As we looked at the guidance for this year a couple of things that we take into consideration. As you know, we have historically given you guys some visibility into revenue by breaking it out into the three buckets, same-store, transitioning and recently acquired. And as we kind of look at those three different buckets, what we're kind of projecting for great rate growth, our overall growth in each one of the bucket is mid-single digits kind of in that same-store bucket and that transitioning bucket kind of high-single digits and then in the recently acquired low-double digits. As we stated in the remarks, acquisitions were including through the first half of the year so not a ton of acquisitions. And as we stated in previous years, when we bring those acquisitions in, we're really bringing in that revenue and it's going to kind of hit on that margin line as we don't expect a lot from in those first years. For occupancy continued growth is what we are anticipating in 2024 and with that seasonality all built into that. So overall, we're really excited about where we're positioned on rates. One of the strongest rate years that we've had was in 2023, as you know, a lot of that comes in the late third quarter, early fourth quarter. So most of that rate growth will then push into 2024 and then really looking at some continued nice growth in the kind of late Q3, Q4 of 2024 as well. Not as probably strong as what we saw in late 2023, but relatively strong compare to historical.

You asked about contribution from acquisitions, obviously the ones that we obviously have some visibility and some deals that we'll do this year and we don't expect much if any contribution from those. The ones that we acquired last year, overall are ahead of schedule largely due to the North American transition, it went extremely well. So, some of our optimism in our guidance comes from the kind of accelerated growth that we saw from those buildings that will continue throughout this year as they mature.

Thank you very much. Just one quickly, we are also getting questions. I know the legal settlement kind of have brought into the spotlight some of the typical kind of legal activity that happens in the healthcare industry. We're also getting questions on we noticed that there was another kind of DOJ, or DOJCID issue that might have been raised earlier this month, regarding Medicare and Texas Medicaid, just wondering to see if that's kind of a similar situation, if that's something that's related to this issue that you just settled or if it's separate, just your take on that? Thank you.

Yes. I mean so the settlement from earlier that we've been disclosing for years now was related to its resolution on a case from 2018 that began as a relator initiated DOJ inquiry. And when the DOJ declined to intervene, that turned into a civil case that just it stretched and stretched over many years. And we brought in a mediator earlier this year to find a suitable resolution and we found one and this saves us from additional defense costs, which was significant time and distraction as well because there's a large breadth to the scope of it and it allows us to move forward without any overpaying of liability. So we just felt like the cost and the timing of distraction made it important for us to just get that one behind us. That's one and like I said, we have disclosed that over the course of many years in our filings. This new one is unrelated, and while there is some references to some Texas Medicaid issues, it's a fairly general inquiry. This is healthcare, when you are dealing with government payers, there is always the chance that they are going ask questions and do audits. We don't know what's driving it necessarily. We don't have a whole lot of details on it and we have retained really good outside counsel to help represent us on it and get to the bottom of what they are asking for. But yes, it is totally unrelated to the prior settlement.

Thank you very much for that and I appreciate you taking the questions.

Your next question comes from the line of Scott Fidel with Stephens. Scott, your line is now open.

Okay. Thank you. Actually just wanted to start, just double click on Ben's question just on the Medicaid rates and one state and specifically, you had an important California rebasing process that was underway for a while and I think at this point, you should have pretty strong visibility into that. Maybe if you can give us an update on sort of how that is playing out and how you expect that to impact revenue, cost and margins in '24?

Great question, Scott. Obviously, California was one of the few states, just to refresh everyone's memory that, continue to pay out the additional 10% estimate in 2023. What the state has done, it's really gone and said, hey, how do we continue to make sure that we make operators in a great position. And so, they went through a process of instituting a re-base program that starts January 1, 2024. At the same time as that, they also went and re-upped their supplemental program that they haven't had in place for a couple of years now. And so, really how we are looking at those and how the state is really looking at this, it's a combination of those two really make up the overall state rate. And so we will have some folks that will enter into the rebasing program, where their rates will be raised and based upon kind of the costs that are there and the increase in costs that we have seen. And then as a part of that program, they will also have to do some additional costs for benefits and other things, but overall really happy with that. On top of that, will also be having a supplemental program that allows us to earn additional funds for quality improvement. So all of that goes into effect in January. So January 1, it went into effect. The state where it's at right now is it actually is with the CMS for their state approval because every state has to get all of their Medicaid rates approved. And so overall, we're really excited about combination of those two programs together. There might be a little bit of a hit on margin because there is some cost associated with getting some of that revenue, but overall feel really great about the additional revenue that's going to come through and the cost that we pay for it.

Okay. Great. And then next question, just want to ask you just on EBITDA margin and on cost of services. First, in the fourth quarter, I know that you have the deferred comp program that can affect that I think your slide deck literally just came out, so we haven't had a chance to review that yet. But maybe just walk through the interplay for us of the deferred comp program on the 4Q margin. And then talk about in your outlook for 2024, how you sort of see core EBITDA margins trending between the low and the high end of the ranges?

Starting with the 2023, the best kind of clarity that we try to give to you is in -- like we mentioned -- like you mentioned in the investor deck, Slides 46 and 47, actually, one slide gives you on a quarterly basis, and the other slide gives it to you on a year-to-date basis. Looking at Q4 specifically, when we go back and look at the -- if you think Q3 relative to Q4, we had a 50 basis input increase in cost of services. When you break down that 50 basis points, 30 of those basis points are related to the DCP. And remember that, that the amount with those earnings really is just offset below the line. So this isn't -- it's an accounting thing, not necessarily an earnings thing. And so when you look at it, it's neutralized below the line. So those 30 basis points are in net income. Those are neutralized. So that's just a P&L placement. And then the other 20 basis points really are what we've been talking about all year long. This recently acquired operations, when they make up a more significant portion of the overall cost, you're going to have the margin impacted by that. And you can see that our recently acquired operations continue to make up a significant portion of our cost. And again, quarter-over-quarter-over-quarter-over-quarter increase were a higher percentage of our overall revenue. A couple of other things with Q3 to Q4. You always have a little bit higher cost associated with benefits and GLPL and we did have some COVID costs. So you've got some -- a little bit of noise to make up that additional 20 basis points up there, but that kind of rounds out 2023. Pushing into 2024, what we try to get you guys to do is neutralize that deferred comp impact, kind of getting that out of there because again, that it's below the line and above the line. And so kind of making that all neutralized, I really think that the overall neutralized effect will have really consistent margins to what we saw in 2023 and before. And so overall consistent to slightly improved on the top end.

Okay. Great. Very helpful. Then just last question. In 2023, you had really significant growth in both operating cash flow and free cash flow as well. And we're just trying to think about how to model off of that, given, again, a very sort of sharp uplift in operating cash flow. So any guidance you can give us on, on thinking about operating cash flow, any sort of working capital or other items that we should be contemplating as we’re trying to trend out our cash flow forecast for 2024?

Yes. As you kind of think through, obviously, in Q1, we always have a significant hit in cash for a couple of different reasons, right? That's when you see the outflow of our incentives go out, all the year-end incentives get paid out in Q1. So you'd anticipate that outflow going into Q1. It will be a little bit different pattern that we saw in 2023. Remember in 2023, we were able to defer a lot of our taxes all the way to Q4. And so you're going to see those taxes really be spread out throughout the year in 2024. Other than that, we just don't have as much lumpiness other than the timing of when we'll pay out the settlement of the litigation matter that we disclosed that's -- there's a little unclarity there. So that will -- my best guess would be maybe late Q2, early Q3, but that will be in there. But other than that, I think we'll have nice, more steady cash flow, but those are some of the things that will make it a little bumpy in Q1 and then kind of steadied out throughout the rest of the year.

Got it. So overall, probably fair to think about operating cash flows just kind of generally consistent with the earnings 2024.

Correct. With the exception of Q1, that little bit of hit I talked about and then the other things being that the DOJ.

And that is currently all the questions that we have in our queue. At this point, I would like to hand the call back over to Barry for some closing remarks.

Thanks, operator, and thanks, everyone, for joining us today. We appreciate your support, as always, and look forward to an amazing 2024.

Thank you. And ladies and gentlemen, that does conclude today's call. Thanks again for joining. You may now disconnect.