Good morning, everyone, and welcome to Enhabit Home Health & Hospice's Third Quarter 2022 Earnings Conference Call. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Jennifer Hills, Enhabit Home Health & Hospice Chief Investor Relations Officer.

Thank you, Abby, and good morning, everyone. Thank you for joining Enhabit Home Health & Hospice Third Quarter 2022 Earnings Call. With me on the call today are Barb Jacobsmeyer, President and Chief Executive Officer; and Crissy Carlisle, Chief Financial Officer. Before we begin, if you do not already have a copy, the third 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 the company's SEC filings, including the Form 10 registration statement dated June 14, 2022, and subsequent quarterly reports on Form 10-Q, each of which can be found on the company's 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 those 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 earnings release. I would like to remind everyone that we will adhere to the one question and one follow-up question rule to allow everyone to ask a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to Barb.

Thank you, Jennifer. Good morning, everyone. Thanks for joining us. I am proud of the progress we have made in the critical areas necessary to set us up for success in 2023. Quarter 3 was our first quarter as an independent company. This is a journey, and we appreciate the commitment of our leaders and our staff as we define and build Enhabit for the future. We remain confident in Enhabit's growth potential as more care is moving to where patients prefer it, in their homes. Let's start with the home health final rule, which was published Monday afternoon. We are extremely disappointed that the final rule included a permanent 7.85% cut to Medicare Home Health Services, which is even higher than the proposed behavioral adjustment of 7.69%. In addition, the temporary adjustments still loom. CMS has not changed their methodology at all, which is very problematic for the industry. 2023 now has a slight reprieve with the provisions in this final rule, resulting in an estimated net increase in home health payments of 0.7%. The industry does not view this as a win, and we will work with our industry partners to determine next steps. Our immediate attention turns to the preserving access to Home Health Act of 2022, introduced by Senators Debbie Stabenow and Susan Collins and representatives Terri Sewell and Vern Buchanan, which would prevent these massive cuts from taking effect in the Medicare home health program until 2026, allowing time for CMS to work with the home health sector to fix their flawed methodology and Medicare rate changes. In the meantime, our Enhabit focus will remain on the things we can operationally do to improve access to patients that prefer their care in the home. As our labor constraints began to ease in the quarter, we were able to accept the increasing number of referrals. Our 31.5% non-episodic home health admission growth drove our 2.7% total admission growth year-over-year. Hurricane Ian did impact our home health operations in Florida and along the Eastern Seaboard before it made landfall on September 28 as our team prepared for its arrival. Our employees did an incredible job with our hurricane preparedness, ensuring we knew each patient's evacuation plan and reminding patients to have their medication and oxygen supplies. Some of our employees were personally impacted by the hurricane and received Enhabit care funds, providing financial assistance for things such as temporary housing, generators and food. Operationally, we estimate we lost approximately 200 home health admissions during the last week of September due to this hurricane. The strategic and operational changes in hospice are starting to make an impact as evidenced by sequential admission growth of 5.2% in quarter 3. Our strongest opportunity is growth, and our focus on our people will drive our growth in both home health and hospice. Our team continues to deliver a better way to care to our patients and to each other as we support our staff through flexible schedules, competitive compensation and benefits and opportunities for personal growth. Our people strategy focuses on recruitment and retention, and we are making progress in both areas. We continue to make good progress on our net new full-time nursing hires with 55 in quarter 3. Our continued focus on retention is also yielding results with our full-time and part-time nursing terms, 10% lower than quarter 3 of 2021. As we reviewed our data and exit surveys, we noted that a consistent theme was the lack of thorough and consistent onboarding for our new hires. Orienting new clinicians is time-intensive, and with staffing constraints in some local branches, orientation was suffering, resulting in turnover. To solve for this, in April this year, we began piloting virtual clinical orientation. This virtual orientation allows for efficient use of clinical preceptors to virtually orient a larger group of clinicians on over half of our orientation materials. This takes a burden off the local branches and ensures consistent training. We started with 17 branches and have now expanded to 40 branches. To date, we have 123 clinicians that have completed or are currently in our virtual clinical orientation. We are pleased with the initial results. We'll continue to measure the positive impact of this process and based on our findings, we'll be prepared to roll out this process to the full company in 2023. Our improved retention is also being positively impacted by the optionality we incorporated into our clinical scheduling. As we have noted previously, to be competitive, we have allowed more flexible schedules than this company has historically offered. This strategic shift has resulted in an uptick in our percentage of PRN nurses year-over-year from 36% last year to approximately 41% this year. With this shift to more nurses wanting PRN status, we need to ensure our wage rates are competitive, so that these nurses choose to work for us. As we examined our rates, we noted we were below market and adjusted those rates to be more competitive. Year-over-year, our PRN rates increased over 7% in the third quarter. While the number of visits conducted by PRN staff were down 5% year-over-year, they did increase almost 14% sequentially, which helped drive our volume growth in the third quarter. Our staff does a great job providing the high quality of care we commit to our patients. As of July, we are 15% above the national average for Star ratings, 5% above for patient satisfaction ratings and 330 basis points better in our 30-day hospital readmission rate. This lower readmission rate is a high-value proposition to our referral sources and payers. This outcome-based measure is one of the driving factors in our ongoing discussions with Medicare Advantage payers. Our payer innovation team has been very busy. While we continue to have regular meetings with the national payers, we recognize that local and regional agreements are critical to the slow but steady progress we're making with our Medicare Advantage pricing, and they provide additional avenues for growth. Our team takes a very disciplined and strategic approach towards these discussions. We are focused on short-term rate enhancements and longer-term innovation via case rates, episodic agreements and other value-based opportunities. In the third quarter, we agreed to terms with 9 Medicare Advantage and commercial plans. 3 are in effect now, and 6 are in credentialing with estimated effective dates by the end of this year. All of these contracts are regional or multistate plans. We have been successful in negotiating 6 of these contracts as episodic payment arrangements with 4 of the 6 being at full Medicare rates. Three are per-visit arrangements with improved rates versus our current agreements. Each successful agreement creates access for these patients to our home health care and in turn, the data we need to continue to reinforce our value proposition. In Hospice, the strategic and operational changes previously made are starting to gain traction. From quarter 2 to quarter 3, we saw growth in admissions and average daily census. Our increased admissions came from hospital settings. While this lowers our average length of stay, it is an important step in diversifying our referral sources. Hospice referrals increased 5.2% year-over-year and 1.6% sequentially. In addition to our focus on growth at our existing locations, we remain focused on our de novo strategy and pursuit of acquisitions. We have opened 3 de novos year-to-date and expect to open another 3 to 4 in the fourth quarter. The pipeline of our de novos remains full for early 2023 as well. We are experiencing delays with local licensing agencies and timing of location surveys. These delays are beyond our control and are impacting the timeliness in which we can open these new locations. Our acquisition pipeline is robust. In October, we acquired Caring Hearts Hospice in Northeast Texas, adding 4 locations to our hospice portfolio. Yesterday, we acquired one location of Unity Hospice in Arizona. We evaluate the opportunities in our pipeline carefully with our team's due diligence focused on ensuring we commit our capital to those with the highest growth potential. Our work in 2022 has been to develop the foundation that will drive our future success. Our priorities continue to include human capital resources to drive recruitment and retention, our payer innovation team, hospice strategic and operational change and increasing sales head count in markets with improved staffing. While we've made progress in each of these areas, this is a journey, and we have yet to realize the full potential of each initiative. With less than 2 months remaining in 2022, we thought it was prudent to update our guidance. These updates shift guidance to revenues of $1.07 billion to $1.08 billion and adjusted EBITDA of $150 million to $155 million. While we may experience some near-term instability, we continue our work to position Enhabit for long-term success. I will now turn it over to Crissy to cover more details of the quarter's performance and our guidance.

Thanks, Barb. Consolidated net revenue was $265.7 million for the quarter, down $8.2 million or 3% year-over-year. We estimate the full resumption of sequestration and the continued shift to more non-episodic payers in home health decreased revenue by approximately $10 million year-over-year. It's also important to remember that the impact of these two items falls directly to the bottom line. Adjusted EBITDA decreased $11.3 million or 26.3% year-over-year and also includes the impact from lower volumes in hospice, the impact of inflation, incremental administrative and general expenses as a stand-alone company, and the disruption from Hurricane Ian. In our home health segment, total admissions increased 2.7% year-over-year, primarily due to continued strong growth in non-episodic admissions. In the third quarter of 2022, our non-episodic admissions grew to approximately 23% of our total home health visits during the quarter. In the third quarter of 2021, non-episodic patients comprised approximately 18% of our total visits. We estimate the impact of this payer mix shift was approximately $5 million on revenue and adjusted EBITDA during the third quarter of 2022. On a year-to-date basis, we estimate the impact of this payer mix shift has been approximately $16 million. We are pleased with our continued Medicare Advantage volume growth. And as Barb discussed, we are taking steps to demonstrate our value proposition to these payers as we negotiate our contract rates. Our cost per visit in home health increased 5.7% year-over-year, primarily due to merit and market rate increases for clinical staff, increased costs associated with fleet and mileage reimbursement and increased costs associated with workers' compensation. In our hospice segment, the strategic changes we made to sales and operations are providing positive momentum. As our labor constraints from early in 2022 began to ease, we were able to accept more patients from our increasing number of referral sources. Our hospice admissions increased 5.2% sequentially from the second quarter. And for the first time this year, our average daily census increased sequentially, growing 1.1%. Hospice cost per day increased 6% year-over-year, primarily due to increased use of contract labor, lower clinical productivity and increased costs associated with fleet and mileage reimbursement. Our recent positive trends in hiring are contributing to the increased use of contract labor and lower clinical productivity. In the second quarter, we hired over 30 new full-time nurses in our hospice segment who were not at full productivity throughout most of Q3. Because we knew we had this capacity coming online, we increased our use of contract labor during the third quarter. We want to show our referral sources that the capacity constraints we had earlier in 2022 are subsiding. In regards to our home office administrative and general expenses, I want to remind everyone that consolidated adjusted EBITDA for the third quarter of 2022 includes incremental costs we incurred as a stand-alone company. For the third quarter of 2021, the net overhead allocation from Encompass Health was $3.4 million. For the third quarter of 2022, we recorded a stand-alone company cost of $5.2 million. These costs include expenses associated with the transition services agreement we have with Encompass Health as well as costs we are incurring to ramp up our team and their resources. Let's transition now to the balance sheet. Information on our debt and liquidity metrics is included on Page 18 of the supplemental slides that accompanied our earnings release. We exited the quarter with net leverage of 3.1x, and we had approximately $224 million of available liquidity. We expect our net leverage to increase in the fourth quarter based on our expected adjusted EBITDA range and because we will likely need to draw on the revolver given acquisition spending during the quarter and a $15 million deferred payroll tax payment that is due. I'll conclude with a few comments regarding our narrowed guidance range for the full year 2022 and provide a few thoughts around 2023. We continue to operate in a challenging environment. In home health, our non-episodic payer mix continues to grow as a percent of our total visits. And while our hospice segment is making progress in recovering its volumes, the recovery is progressing slowly. In addition, while we are pleased with the progress we are making in improving our clinical capacity in both segments, we are having to pay more for these clinicians and use contract labor to keep our referral pipeline strong as the new staff ramp up. And as mentioned earlier, Hurricane Ian impacted our home health operations. In addition, normal seasonal patterns are not holding. Historically, the fourth quarter is one of the strongest quarters of the year for our business. October got off to a slow start. While it ended stronger than it started, we believe a conservative approach to our guidance is prudent at this time. We now believe adjusted EBITDA for 2022 will be in the range of $150 million to $155 million. In regards to free cash flow, we currently expect to generate between $89 million and $106 million in 2022, and we plan to use our free cash flow to fund growth in our business. As for 2023, it's too early to provide specifics. At a high level, these are the factors that should be considered when thinking about next year. In both segments, we will not anniversary the resumption of sequestration until July 1. Medicare pricing in the first quarter will be impacted by 2%. In the second quarter, we'll experience an additional 1% for sequestration year-over-year. In home health, we've already discussed the final home health rule in regards to Medicare pricing. In addition, we expect the percent of our non-episodic visits and the percent of total home health visits to continue to increase. In hospice, we expect the strategic and operational changes we've made to continue returning our average daily census to historic levels. For pricing, we expect our reimbursement rate increase in hospice to be in line with the final rule at 3.8% for the first 3 quarters of the year. In regards to cost, we expect inflationary and macroeconomic pressures will continue to persist. During 2022, our labor costs have increased between 5% and 6%. While we expect the current labor environment to persist into 2023, we've made meaningful net new hires in the last few quarters. And with our continued focus on recruitment and retention, we believe we can drive volumes and improve productivity next year. Finally, we continue to believe our incremental stand-alone company cost will be in the range of $26 million to $28 million, and we expect to reach that run rate in the back half of 2023. We expect to provide 2023 guidance in February when we report our fourth quarter and full year earnings for 2022.

Your first question comes from the line of Joanna Gajuk from Bank of America.

So regarding your comments on the guidance for 2022 and its reduction, you mentioned that you anticipate the non-episodic payer mix will continue to be a challenge. Are you suggesting that this challenge will be greater in Q4? You indicated it was around $5 million in the third quarter and $16 million year-to-date. You mentioned that Q4 is expected to see a larger impact. Additionally, for 2023, you expect this mix to remain steady or even accelerate in terms of the challenges when compared to the previous year.

Yes. Joanna, this is Crissy. Thanks for that question. It's certainly something that we're paying a lot of attention to. As I mentioned in my prepared remarks, 2021, we were at 18% of that payer mix as part of our total visits. Right now, for all of 2022, we expect that payer mix to be at 23%. We believe that we will exit the year slightly higher than that. Fourth quarter is probably going to be something closer to 24%. And then in 2023, again, it's a little too early. We're not going to go too far into 2023 discussions. But again, you can draw your own conclusions just based off the historical facts.

And if I may, a follow-up on the commentary around this new or revised, I guess, MA contracts, the 9 that you highlighted. It sounds like the rates improved, but sounds like not all of them moved all the way to fee-for-service, so just to clarify that. And the second, I guess, how meaningful are those contracts as a percent of your non-episodic business or your MA however you are willing to kind of size up these improved contracts?

Sure. So of the 9, we were able to negotiate 6 of them at an episodic rate. The discount was about between no discount to 10% discount for episodic contracts. On our 3 per visit, the good news there is that our discount averages around 25% versus that current 35% to 40%, so making progress on the discount piece of that. We will have a spread over 14 states with these 9 new regional and multistate plans. I would say the largest volume potential is in 6 of our states. It's hard to talk about volume at this point because at this stage, what we're doing is getting the list out to all of our sales team members so that they can be communicating this to our referral sources so that they know these are new regional contracts that we can now accept referrals on. So certainly hope to have more information on that in the new year but a little too early to say how it will impact the volume.

Yes, I was actually thinking just to quantify like how big these are in your current business, how meaningful those changes on these rates would be for a contract. But I guess the second question here would be like, are you expecting new volumes? But I was actually initially asking about how meaningful are these contracts as a percentage of your business.

All of these are new contracts, so they represent new volume. As a result, they do not affect the current rates associated with existing contracts. This means all of this will be brand new volume. This is part of securing more contracts and improving contract quality.

Your next question comes from the line of Jason Cassorla from Citi.

Just with the 55 net new nursing hires in the quarter, while incrementally positive, the pace of hires slowed from the 96 in the second quarter. So I guess it would just be helpful if you could discuss the pacing of those net new hires month-over-month throughout the course of the third quarter. And then sorry if I missed this, but can you give us an update on the total number of staff in constrained locations? And then just a quick one there. And then maybe just help out, what inning do you think you're currently at in terms of reaching a staffing level that you wouldn't kind of result in capacity restrictions as you define them? So any help there on the hiring front would be great.

Certainly, the 55 new hires were fewer than we anticipated. We saw a sluggish inflow of candidates throughout the third quarter, with an increase in applicants only starting in October. In fact, our nursing applicants in October were 11% higher than the monthly averages from the third quarter. We're pleased to see the improvement in applicant flow. Regarding restrained locations, home health remained stable from the second quarter to the third quarter. This stability is partly due to the movement of branches, as some have grown and now require additional staffing due to previous constraints no longer applying. So, home health remained stable from the second quarter to the third quarter. On hospice, we actually are down to 11 constrained locations versus 17 in quarter 2. That really speaks to what Crissy was talking about on those positive hires that we saw for hospice. So we are seeing the staffing-constrained locations for hospice improve.

Got it. Okay. And then just as a follow-up on the final 23 Medicare rates with some retreat from the proposed rule. I'm curious if you think the rate development there would impact the home health M&A pipeline, but you've discussed a greater near-term focus on the hospice assets. But any thoughts on the pipeline for home health, just given the rate update would be great.

Sure. I'll comment and then I'll see if Crissy has anything to add. I think it will be interesting to see because certainly, there were many that kind of took a step back with the proposed rule out there. It will be interesting to see if more come online now because obviously, there's clarity for it next year but not for future at this point. They're already feeling not only the constraints of labor but also the impact of that MA shift even for the smaller mom-and-pop agencies. So I do think it will be interesting to see if we see an increase in the pipeline for home health. And I'll let Crissy add to that.

So you're absolutely right. I think our pipeline is geared a little more towards hospice right now. And as Barb mentioned, we are prioritizing opportunities that offer the greatest growth opportunity for our business. When we look at these opportunities, we're looking at Medicare beneficiaries in the market, opportunities for scale and density in that market, overlap with existing service lines. And now especially we've added staff availability when we're looking at markets, that's a critical success factor. Specific to home health, we do believe that the reimbursement uncertainty and that continued shift to the lower-paying Medicare Advantage contracts may push them to market. Those sellers are going to have to acknowledge the reimbursement uncertainty and its impact on multiples, especially the smaller players. So we're certainly not taking home health opportunities off the table, but we are scrutinizing them more currently.

Your next question comes from the line of Brian Tanquilut from Jefferies.

I guess my question for you guys, first, Crissy or Barb. As I think about the long-term guidance ranges that you provided pre-spin-off completion and where we stand today? I mean how are you thinking about some of the growth rates that you have provided in the past? And maybe looking past some of this near-term volatility, I mean, how are you thinking about the business in general in terms of the opportunities to grow organically and get some margin expansion and recovery from here?

Yes, Brian, this is Crissy. I really appreciate that question and the focus on the long term and not the near term. The factors that combine to support the long term really haven't changed. It's the efficacy of home care. It's undeniable. The continuing growth preference for home-based care, the cost efficiency of home-based care. The demographic tailwind, all of those factors remain in place and haven't changed. We have a long-term target out there of home health volume growth at 10-plus percent. Within our home health service line, we believe that our use of care transition coordinators, our geographic coverage, our willingness and ability to treat high acuity and polychronic patients. All of those factors make us an attractive partner in preferred provider arrangements and with referral sources. In addition, as you've heard us say numerous times, our hospital readmission rates are over 300 basis points lower than the national average and they're lower than our peers. And that drives value to payers and makes us a provider of choice. And so we believe that there will be industry consolidation opportunities that we just talked about. That's going to be fueled by reimbursement uncertainty, all the factors that we've already talked about. And then we think that's going to play well into our multifaceted home health growth strategy. In regards to hospice, that target that you mentioned is 10% to 15% volume growth. We believe hospice is a significant area of opportunity for us. Hospice use among Medicare beneficiaries has grown substantially in recent years and still is underused by those that are eligible for it. And we believe that the changes we're making in our hospice business, such as the new staffing model that we've talked about, the diversification of referral sources, all of those factors, we believe, set us up for success in that growing area. So for these reasons, we really haven't taken the long-term admissions growth targets off the table at this time. I think the key success factors to achieving those long-term targets include recognition of the value proposition by Medicare Advantage payers, things that lead to episodic rates. So near term, higher per-visit rates longer term, episodic rates. It's going to be dependent on our ability to be acquisitive. And then, of course, our de novo strategy plays a part in that as well. So again, at this time, we continue to support those. We'll continue to monitor those and provide an update to the investment community as part of our Q4 and 2022 earnings call in February.

And Brian, I'm just going to add to what Crissy said. I mean, it's why we are putting such a focus on the recruitment and retention. Obviously, early on, it was on compensation benefits. Now it's more on flexibility and opportunities for growth because, as Crissy mentioned, I think the growth is all there. We have to staff so that we can have that growth.

Got it. Okay. And then I guess shifting gears a little bit here since you mentioned MA and congrats on getting some of these new contracts. But as I think about your existing MA business, I know it's heavy per visit right now, right? So just curious, what are those conversations like with some of the existing clients in order to try to drive that rate growth? Because obviously, that's where a lot of the growth is coming from, at least in the post-acute discharge, it seems like it's heavily weighted to M&A. So just curious what the strategies are there? And then what the conversations are like?

Certainly. One key takeaway from my experience, particularly with NASH and larger healthcare plans, is that while they express interest in value-based agreements and alternate payment models, they remain quite focused on unit costs. For instance, we are currently discussing with a national payer the possibility of piloting a program in regions experiencing access challenges. This pilot could involve a higher per visit fee or an episodic payment structure aimed at demonstrating improved access for members. Additionally, we plan to leverage this data to shift the conversation away from strictly unit costs and examine the broader impact on overall expenses. We are proposing various options, including a regional pilot, to expedite progress with national payers. However, we also utilize our existing plans to foster the growth of episodic care. For example, we've seen a 3% year-over-year increase in Medicare referrals from sources that send us both UHC and Medicare during the third quarter. Although we noted a 210% rise in UHC referrals, the growth in Medicare is particularly encouraging, and we need to maintain our focus on this trend in our markets.

There are no further questions at this time. Ms. Jennifer Hills, I turn the call back over to you.

Thank you, Abby. A replay of this call will be available on our website. Thank you again for joining today's call.

This concludes today's call. You may disconnect.