Thank you for standing by, and welcome to the Pennant Group Second Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now hand today's call over to Derek Bunker, Chief Investment Officer. Please go ahead.

Thank you, Tamica, and welcome, everyone. Thank you for joining us today. Here with me today, I have Brent Guerisoli, our CEO; John Gochnour, our President; and Jen Freeman, our CFO. Before we begin, I have a few short housekeeping matters. We filed our earnings press release and 10-Q yesterday. This announcement is available on the IR section of our website at pennantgroup.com. Replay of this call will also be available on our website until 5:00 p.m. Mountain Time on Friday, September 9, 2022. We want to remind anyone that may be listening to a replay of this call that all statements made are as of today, August 9, 2022, 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 independent subsidiaries, collectively referred to as the service center, provide accounting, payroll, HR, IT, legal, risk management and other services to the other operating subsidiaries through contractual relationships. 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 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 and our and similar terms used today are not meant to imply nor should it be construed as meaning that the Pennant Group 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 that 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 in our 10-Q. And with that, I'll turn the call over to Brent Guerisoli, our CEO. Brent?

Thanks, Derek, and welcome, everyone, to our second quarter 2022 earnings call. Thank you for joining us today to discuss our quarterly results. To begin, I'd like to take a moment and personally thank Danny Walker for his partnership and friendship over the last decade. As was previously announced, Danny stepped aside as CEO on August 1 and continues in the role of Chairman. His leadership was instrumental as we built this company from the early days of our history as a fledgling start-up, we experienced tremendous growth and expansion and navigated the challenges as a new public company in the midst of a pandemic. Danny's influence will continue to be felt across the organization, and on behalf of the leadership team and all of the Pennant, we will forever be grateful. As we enter another chapter in our story, we have a deep bench of seasoned and talented leaders across both segments in the service center that have been critical to our growth since the beginning and are prepared to accelerate our performance. Now as I step into the CEO role, I want to reiterate our commitment to the core operational and cultural principles that have been instrumental to our success over our decade of history and articulate why we're so excited for the future. Our differentiators are: one, our innovative operating model focused on empowering and developing strong leaders; two, our disciplined growth strategy; and three, our ability to achieve quality care outcomes and lower cost settings. First, our innovative operating model is the foundation of our success. Our operating model is founded on two Pennant's fundamental to our approach to health care services: one that health care is a local endeavor where providers are most successful when key operational decision-making meets local community needs and occurs close…

Thanks, Brent. Our second quarter operational results are consistent with our performance ramp expectations. We are pleased to report solid results in home health and hospice and improving results in our senior living segment in the face of turbulent economic conditions and lingering COVID flare-ups. Key to our performance in the quarter was our ongoing focus on operational excellence and empowering our local teams with improved systems and support. While there remain labor, inflationary and regulatory headwinds going forward, we are poised to deliver stronger results in the second half of 2022 and anticipate more organic and strategic growth in the near future. In our home health and hospice segment, strong top and bottom line results were led by a 6.3% increase in Medicare home health admissions and a 3.5% increase in hospice admissions, each over the prior year quarter. Our home health revenue grew a strong 15.3% over the prior year quarter as we continue to strengthen our relationships with partners across the health care communities we serve, and our acquisitions from 2021 performed better. Though there is still some softness in our hospice average daily census, momentum is building as we saw ADC grow 2.4% sequentially over the first quarter of 2022. As our average length of stay continues to normalize and our local teams continue strong emissions, we expect our ADC to continue to improve. Throughout the quarter, our leaders exercised rigorous cost discipline in the face of labor, fuel and other inflation-sensitive cost increases, leading to adjusted EBITDA margin improvement of 140 basis points compared to the first quarter of 2022. Our clinical metrics remain solid with the majority of our home health agencies achieving a CMS star rating of 4.5 or above. Our real-time acute care hospitalization rate of 12% is notably below the national…

Thanks, John. As mentioned, year-to-date, we transferred the operations of five senior living communities to our partners at Ensign, acquired one real estate asset underlying our senior living operations and acquired the operations of the senior living community in Boise, Idaho. During the quarter, we also acquired a start-up home health agency in Montana, a state in which we currently provide hospice services, expanding the continuum of care we can offer patients and referral sources. The combination of these transactions better position our operations for strength and growth. Our senior living portfolio rationalization provides us a more streamlined platform for which to continue our growth in the segment, while improving the overall quality advantage of our portfolio. Our pipeline of potential acquisitions continues to expand with robust opportunity in both segments. We remain focused on evaluating operations that fit our strategic criteria of small- to medium-sized operations with strong reputations in their communities with significant organic growth potential where our operational expertise can capture that upside for our stakeholders. While we continue to be very disciplined as we look to deploy capital, our cash flow is improving, we are pleased to have a strong balance sheet, and we see several dynamics that favor strategic buyers like ourselves that are focused on maintaining the legacy of sellers, providing an exceptional employee experience and delivering quality clinical care. We regularly engage with owners of high-quality businesses, both on and off market and look forward to partnering with them and bringing their business into the Pennant family in the future. Our organic and strategic investment opportunities are tremendous, and we're excited for what we can accomplish on this front in the upcoming several quarters. With that, I'll hand it over to Jen for a review of the financials. Jen?

Thank you, Derek, and good morning, everyone. Detailed financial results for the three months and six months ended June 30, 2022, are contained in our 10-Q and press release filed yesterday. Our second quarter results are in line with our expectations for the first half of the year. For the three months ended June 30, 2022, we reported total GAAP revenue of $116.3 million, an increase of $6 million or 5.4% over the prior year quarter. GAAP diluted loss per share of $0.09 and non-GAAP adjusted earnings per share of $0.14, an increase of $0.03 or 27.3% over the first quarter 2022. Please note that our non-GAAP adjusted earnings per share results for the three months ended June 30, 2022, include the benefit of a 1% Medicare sequestration holiday as well as the effects of our COVID-related expenses and lost revenue. We view COVID-19 as endemic, and an ongoing operational reality we will continue to navigate through and so do not adjust our results for its impact on our revenue or expenses. As you'll note in our financials, we recognized a loss on the transfer of the five senior living communities to Ensign in the amount of $6.7 million, which approximates a portion of the eventual CapEx needs estimated at some of those buildings. The benefit of this transaction on our cash flows will be seen in 2023 and beyond, as we focus our capital expenditures on our remaining portfolio of communities to enhance their quality and amenities. We are pleased with our sequential improvement in our GAAP cash flow from operations for Q2 of 2022 of $9 million compared to cash used in operations of $4.1 million in Q1 of 2022. As a note, without advanced payments, cash flow from operations would have improved to $10.5 million in Q2…

Thanks, Jen. It's my pleasure to spotlight a few leaders in our organization that have achieved remarkable results through operational excellence. Kinder Hearts Home Health and Hospice in Abilene, Texas, led by CEO, Travis Jones; and DCS Lisa Flores, has produced remarkable financial and clinical outcomes, while truly going above and beyond to meet the needs of their partners in the local health care community. Travis, Lisa and the Kinder Hearts team exemplifies the unique advantages of our locally driven operating model. Year after year, they've produced strong on financial results as they provide critical care to the Abilene community. In recent years, they've expanded their reach to serve patients and adjacent communities, growing organically as they sought to be the provider of choice throughout West Texas. As they identified opportunities to invest and expand strategically, they've acquired agencies and surrounding communities and developed leaders to support growth in multiple adjacent markets. This emphasis on being the provider and employer of choice in their community has helped them achieve top and bottom line success growing revenue and increasing EBIT by 20% in the second quarter over the first quarter of 2022 and by over 30% over the prior year quarter. The future is bright in West Texas with leaders like Travis, Lisa, and others at Kinder Hearts. At Las Fuentes Resort Village in Prescott, Arizona; Executive Director, Doug Libby; and Chief Operating Officer, [Ray Allen Rogers], have led their team to success as they built a reputation as a preferred community and employer of choice in the Prescott area. Doug and Ray Allen have helped lead the Las Fuentes team to steady top and bottom line financial growth, thanks to a culture of caring and dedication to providing life-changing service to residents and employees, while being a top senior living destination for many years and consistently achieving excellent results, Doug and Ray Allen have continued to build a successful culture, leading to another year of revenue, EBITDA and occupancy growth. In addition to becoming a premier senior living solution in their local community, these two leaders and the amazing team at Las Fuentes have actively ported their cluster and market partners throughout Arizona helping build culture and drive results in our senior living communities. Their team exemplifies discipline and shared ownership over the community's results and act as true partners throughout Pennant. We're excited for what the Las Fuentes team has in store in the future. Before we move to Q&A, I want to make sure to recognize and thank all of our incredible clinical partners and frontline workers who provide lighting service to our patients and residents every day and make us who we are. With that, we'll open it up for questions. Tamica, can you please instruct the audience on a Q&A procedure?

[Operator Instructions] Your first question is from the line of Scott Fidel with Stephens Inc.

This is actually Jordan Bernstein on for Scott. I appreciate the additional color this quarter on adjusted EBITDA guidance. And then my first question is, like some of the strength in the quarter and home health segment was driven via strong rate. I was wondering how you guys view the breakdown between rate versus volume in home health in the second half of the year.

Yes. Thanks, Jordan. I appreciate that question. This is John. In fact, we have really strong home health revenue growth, and it was driven about equally by admits and also by rates. I think there's a couple of things at play there. One is just our clusters continue to work effectively to manage the new reimbursement structure put in place by PDGM. And as we go forward, we expect that, that will continue. We're working in the community to identify those patients who need our services. And we'll work hard to identify those who are sometimes in those early periods. We're also -- we've been very effective at getting patients out of the institutional settings, so out of the hospitals. And that's something that continues to be a focus. And so in the second half of the year, I would expect that, that will continue. We'll continue to focus on revenue growth from a volume standpoint, but it'll also be making sure that we manage effectively those rates and that we prepare effectively for the transition in the proposed rule.

Appreciate that. And then I guess I have one more question on the modeling side. And I appreciate the color on the general ramp, you spoke to in the second half, but maybe you can break that down for us a bit more between the third and the fourth quarter?

Yes. So we are seeing ramp in the third and the fourth quarter consistent with what we've experienced between the first and second quarter. And so we would continue to -- we expect to continue to have a modest growth in our senses to realize the impact of the hospice final rule in the fourth quarter, which is about 3.6% for us. And then as well, continued census growth in hospice as well as continued improvement in both rate and census in our senior living, consistent with what we've seen so far.

Appreciate it. And I guess one more question, if I may. Would you be able to identify for us and quantify for us any of the labor dynamics ongoing currently, whether on hiring or turnover, anything quantifiable would be appreciated?

Yes. We continue to work within a unique labor environment. And as we've talked about before, I think that really comes back to a market-by-market evaluation. In some of our markets, we're seeing that labor pressure ease. We've seen a significant reduction in turnover, for example, in our senior living business. In other markets, it remains tight. I'll highlight the Pacific Northwest and Northern California where we continue to have a increase volume that are sort of limited by our ability to recruit enough staff. And so we expect that there will be continued pressure. We see it lessening. And anecdotally, we would say that it's certainly easing in many of our markets. And so our focus for the second half of the year will continue to be identifying, recruiting, developing those individuals who can add strength to our teams, but we are seeing a little bit of easing on the labor front.

Your next question is from the line of Tao Qiu with Stifel.

Thank you for providing adjusted EBITDA guidance. I wanted to ask about the revenue guidance. It looks like you reaffirmed the $450 million to $460 million range. But if we look at the total revenue for the first half, I think you did $230 million revenue. So the reaffirmed revenue guidance seems to suggest very little growth on the top line, other than the senior housing operations activity, is there something else I'm missing here? And how should we interpret that small increase?

No, Tao. The main impact for the second half of the year is the transfer of those communities out of the revenue. And so we are looking at our revenue and expecting it to continue to grow. We're reaffirming and we're expecting that we would be towards the upper end of our guidance on revenue. So we wanted to just take an approach where we're evaluating the transfer of that revenue out of that number and taking that into consideration.

Okay. Got you. It sounds like it's more [indiscernible] conservative.

Yes. The other thing to note is the impact of the sequestration in the third and fourth quarters that we will experience. We're taking that all into account.

Got you. That's helpful. And the second question, with the new agencies that have done really well over the past two quarters. And I think those -- that bucket contributed to most of the growth number we saw. I'm curious if you could quantify for us how much additional upside you can expect on that pool of assets, either in terms of volume or margin upside?

Yes, Tao, it's absolutely right. We saw really strong growth in our new store assets, and those are those that were acquired in 2021 and through the year in 2022. We still have a significant number of -- we still have significant opportunity within that portfolio of assets. There's a lot of upside. We've seen several of them just take off and experience the type of growth that's consistent with our tradition, kind of what Brent spoke to earlier and what Derek described in his piece of the call. Others have continued to take a little bit longer to turn, as we've described in prior earnings calls. In some situations, they're in markets where the labor environment has been more competitive. And so we see significant continued upside opportunity. But we have had several of those -- I'll use the example of our home health down in Tucson, Arizona, and our hospice that we highlighted last quarter in Sacramento, California, each of whom have been dynamic contributors to our operating results they have effectively met the need or the gap in the local community health care ecosystem that they're part of. And they've grown rapidly and a provider of choice in those communities. So the good news is there's plenty of continued upside in that set of acquisitions that we did in '20 and '21 as well as the small acquisition we did in the first part of 2022.

Got you. And my last question is really on the investment outlook. You mentioned that your pipeline contains both home health and hospice, but it sounds like the tone is more bullish than some of your peers. How does that propose you really change the conversation in terms of negotiation with potential sellers and do you think you will accelerate the growth after kind of the final row came out? Or do you think they already view that you can close before that?

Yes. It's a good question, Tao. I mean, we've seen this in the past, any time there's change in reimbursement. It does impact valuations, and we take that into account in our discussions and our valuations with any of the partners and potential acquisition targets. I would anticipate that it will have an impact. It will be a lot more -- I think you'll see a lot more activity on the home health side. And one of the things that we highlighted, and I want to emphasize here is that when we got started in the early 2010s, there was a lot of uncertainty around reimbursement, and we saw a pretty significant decline in our rates. And that really opened up for us to be able to step in and have aggressive growth for several years. And so we're sort of anticipating a similar type of trend. And so I think from that perspective, we're -- we see that as a positive thing, but we continue to just utilize our tools and evaluate each operation based on the projected expectations of that -- the impact of the proposed rule.

[Operator Instructions] Your next question is from the line of Ben Hendrix with RBC Capital Markets.

I was wondering if you could give us a little more detail on the ADC growth you saw sequentially in the hospice from the first quarter, are there any key drivers you can call out there like the mix of referral sources or earlier referrals or the impact of improving occupancy and senior living and skilled nursing overall? Any commentary would be helpful.

Thanks, Ben. This is John. We have seen that sequential growth, and you highlighted one of the key factors. We see -- just like our occupancy has improved in our senior living business, we're seeing that with a lot of our referral partners. We saw throughout the course of the last two years a significant decline in our facility census. We've always been a strong in-home provider, but there's great opportunities with those facility patients to identify earlier on in their disease prognosis when they need hospice care. And so what that does is it just contributed to a length of stay that's kind of been varied from its normal course over the last couple of years. And so what we're excited about is we're seeing occupancy return to normalized levels with some of our partners, and that's resulting in increase in referral flow from those facility partners. And so we expect that we're going to continue to see some positive things related to the normalization of length of stay related to the percent of our referrals and the percent of our patients that are housed in those senior living and skilled nursing communities and facilities. And so we're very excited about what that represents. It's still a challenging environment. There's still a number of people -- when about the number of people who have passed away during the global pandemic, but ordinarily would have received hospice services. There still is a significant decline. But as occupancy returns to normal in our partners -- our community partners and as we're able to set ourselves apart as the provider of choice, and we're seeing that in different markets across the country where we've been able to really push that forward and drive admissions, like I described in Sacramento, but in the Bay Area is another example. There's a lot of places that are beginning to trust us more and more. On the ADC side, there's also been a couple of markets who have been more specifically impacted during the pandemic. And one of the nice things about that sequential growth is we're starting to see some stabilization and growth in some of those markets. And so it certainly gives us a sense of momentum for the future.

At this time, there are no further questions.

Okay. Well, thank you, Tamica, and thank you, everyone, for joining us today. We hope you have a great day.

Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your lines.