Good morning, everyone and welcome to Enhabit Home Health & Hospice's Fourth Quarter 2022 Earnings Conference Call. At this time, I would like to inform all participants that their lines will be in a listen-only mode. After the speakers' remarks, there will be a question-and-answer period. 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 Mark Brewer, Enhabit Home Health & Hospice Chief Investor Relations Officer.

Thank you, Chris and good morning, everyone. I want to thank you for joining Enhabit Home Health & Hospice for our 2022 fourth quarter earnings call. With me on the call today are Barb Jacobsmeyer, President and Chief Executive Officer; and Crissy Carlisle, our Chief Financial Officer. Before we begin, if you do not already have a copy, the fourth 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 two 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 certain 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, included in the Form 10-K and subsequent quarterly reports on Form 10-Q, each of which will be available on the company's website once filed. 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 today, 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 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 participate. If you have additional questions, please feel free to reenter the queue. With that, I'd like to turn the call over to Barb.

Thank you, Mark. Good morning, everyone. Thanks for joining us. We appreciate the commitment and diligent work of our Enhabit Home Health & Hospice leaders and our staff as we focus on delivering our care where patients prefer it in their homes. It is the quality of the care our team provides that is the catalyst to our future growth. Starting with a recap of our financial results. On a consolidated basis for fiscal year 2022, our financial results were revenue of $1,083.1 million and EBITDA of $159.3 million. Significant changes were required in 2022 to lead important strategies for our future success. We added the company's first Chief Human Resource Officer in January of 2022. We established our payer innovation team in May of 2022. We added an executive with extensive Hospice experience to lead our Hospice team in June of 2022. All of this while preparing and executing the plans necessary to spin into our own company on July 1 last year. Let's start with the progress we've made in these notable 2022 changes. Our Chief Human Resources Officer has worked with our data and analytics team to develop a robust human capital data set. This is allowing us to drill down much further than we could historically on understanding what is happening with our workforce and what we need to do to recruit and retain our staff so that we can meet the demands for our care. We are pleased to report that our full-time nursing candidate pool increased 19% in quarter four over last year. This drove 101 net new full-time nurses in the fourth quarter, 60 in Home Health and 41 in Hospice. Our full-time vacancy rate ended 2022 at approximately 24%, which accounts for some of the recalibrating of needs based on staff that have shifted from full-time status to part-time or PRN. In 2021, approximately 35% of our nursing staff were PRN. As of December 2022, we now have approximately 39% in a PRN status. This means we need more people or full-time equivalent to meet demand. With the progress in clinical staffing, it is now imperative that we ensure sufficient business development resources in the field. We had 83 less direct sales headcount in December 2022 versus 2021, 59 less in Home Health and 24 less in Hospice. As I will discuss later, we made some organizational changes this last month that resulted in 60 additional frontline sales individuals now back in the field to drive growth without the need for additional total sales headcount increase. Let's move now to our payer innovation team. We are pleased with continued progress of our payer innovation team. 2022 was a strong year for non-episodic home health admission growth at 26.7% for the full year and 19.9% for quarter four year-over-year. With a continued shift of Medicare beneficiaries moving to a Medicare Advantage payer, our payer innovation team has been critical to setting us up for volume growth in 2023. While we continue to meet and negotiate with the national payers, we have established a strong regional contracting strategy. In the second half of 2022, we have been successful negotiating 18 new regional agreements. Nine of these are now in effect and seven of those are at episodic rates. One particular agreement, which we mentioned in the quarter three call, became effective on October 1. This agreement covers 13 of our branches in six states. These 13 branches experience 4.2% growth year-over-year in quarter four, primarily due to this new agreement. As evidenced by this one multi-state agreement, the local and regional agreements provide avenues for growth. Each successful agreement creates an opportunity for us to be a stronger resource to our referral sources. It creates access for patients to Enhabit home healthcare, and in turn, the outcome data we need to continue to reinforce our value proposition with the payers. Turning to our Hospice segment. Our strategic decision to add an experienced Hospice executive to our team has led to specific opportunities for improvement in our staffing and in our diversification of referral sources. We experienced a 0.7% same-store, and 2.9% total store ADC growth sequentially. We were pleased with the stability considering our ADC in quarter four last year dropped 200 from the prior quarter as fewer patients tend to initiate hospice services over the holidays. The strategic sales and operational changes previously made in this service line are starting to gain traction. The strategy to move away from our home health staffing model to a case management model has supported our hiring efforts and in some markets we have successfully rehired previous staff that enjoyed our culture, but not our previous staffing model. As I mentioned, we had 41 net new nursing hires in quarter four in Hospice, currently 30 are in orientation. We used above average contract labor in quarter four as we staff to rebuild referral relationships, while new hires were in orientation. We peaked at 26 contract RNs in 20 branches. By the end of January, we already have this managed down to 12 contracts in seven branches. We are making great progress on the strategic initiative we initiated in 2022 with labor challenges, referral source needs, diversified payers, and a focus on efficient acceptance of referrals; our operational and sales team need to be aligned. With this in mind, our regional leadership worked diligently over the past four months on a new organizational structure. We announced phase one at the end of the year and the final phase mid-January. Historically, our sales and operations team had a very different reporting matrix with little to no alignment, with the new structure now in place, complete alignment now exists. We are confident this sales and operational alignment will drive success clinically and operationally. In addition to our focus on growth at our existing locations, we remain focused on our de novo strategy and our due diligence of potential acquisitions. In the fourth quarter, we made three acquisitions that added five hospice locations and one home health location. We evaluate the opportunities in our pipeline carefully with a priority for adding hospice, where we have home health and home health acquisitions that provide tuck-in opportunities for improved scale and density. We opened four de novos in 2022 with two to four anticipated in quarter one. The pipeline of de novos remained strong for 2023. For 2023, we remain confident in the need for our home-based services. Our guidance for 2023 includes consolidated net operating revenues $1,110 million to $1,140 million; consolidated adjusted EBITDA of $125 million to $140 million; adjusted earnings per share of $0.50 to $0.89 per share. Crissy will cover the key considerations underlying this guidance. And with that, I'll turn it over to Crissy.

Thanks, Barb. Consolidated net revenue was $275.1 million for the fourth quarter, down $1 million or 0.4% year-over-year. We estimate the continued shift to more non-episodic payers in home health and the resumption of sequestration decreased consolidated revenue approximately $11 million year-over-year. These items were offset by an approximate $5 million audit recovery related to a prior year home health medical claims review, improved collections experience related to Medicaid in hospice and a 3.8% increase in our hospice Medicare reimbursement rate, effective October 1st. While all of these items fall directly to the bottom line, adjusted EBITDA, which decreased $8.7 million or 17.8% year-over-year, also includes higher cost of services and incremental administrative and general expenses as a standalone company. In our Home Health segment, total admissions decreased 1.5% year-over-year as continued strong growth in non-episodic admissions was offset by a reduction in episodic admissions. In the fourth quarter of 2022, our non-episodic visits grew to approximately 26% of our total Home Health visits. In the fourth quarter of 2021, non-episodic visits comprised approximately 20% of our total visits. We estimate the impact of this payer mix shift was approximately $6 million on revenue and adjusted EBITDA during the fourth quarter. For full year 2022, we estimate the impact of this payer mix shift was approximately $22 million. As Barb discussed, we are making steady progress demonstrating our value proposition to payers as we negotiate new agreements with improved rates. Our cost per visit increased 7% year-over-year, primarily due to increased labor costs and increased costs associated with fleet and mileage reimbursement. Approximately 300 basis points of that increase was driven by a year-over-year increase in employee group medical claims. In our Hospice segment, the strategic changes we made to sales and operations are providing positive momentum. Our labor constraints from early in 2022 continue to ease, and our average daily census grew 2.9% sequentially from the third quarter. Cost per day increased 12.1% year-over-year, primarily due to lower clinical productivity, increased use of contract labor, increased costs associated with fleet and mileage reimbursement, and an increase in employee group medical claims. With the success we had hiring nurses in the back half of the year, we had new full-time nurses in our Hospice segment who were not at full productivity throughout most of the fourth quarter. Because we knew this capacity was coming online, we increased our use of contract labor. While this negatively impacts our cost per day in the near term, it shows our referral sources that the capacity constraints we experienced early in 2022 are subsiding and sets us up for success going forward. In regards to our home office administrative and general expenses. Consolidated adjusted EBITDA for the fourth quarter of 2022 includes incremental costs we incurred as a standalone company. For the fourth quarter of 2021, the net overhead allocation from Encompass Health was $3.6 million, as shown on page 27 of the supplemental slides that accompanied our earnings release. For the fourth quarter of 2022, we recorded standalone company cost of approximately $5 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 16 of the supplemental slides. We exited the quarter with net leverage of 3.5 times and we had approximately $179 million of available liquidity. Our net leverage increased sequentially from the third quarter due to a $20 million draw on our revolver in use of existing cash to fund three acquisitions totaling approximately $36 million, a $15 million deferred payroll tax payment associated with the CARES Act and a $9 million decrease in trailing 12-month adjusted EBITDA. We'll talk more about our leverage after I cover 2023 guidance. Before I leave 2022 financial results, I want to mention two items that should be considered when bridging 2022 to other years. As I've already discussed, in December 2022, we received approximately $5 million related to the successful defense against a prior year medical claims review. In addition, throughout 2022, we experienced improved collections related to Medicare Advantage payers and Home Health and Medicaid and Hospice. These improved collection efforts allowed us to decrease our revenue reserve percentages in both areas. We estimate this benefited 2022 revenue and adjusted EBITDA by approximately $4 million. Let's now move to 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. 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 support our referral pipeline as the new staff ramp up, and the net home health market basket update of 0.7% for 2023 is not enough to offset rising labor costs before we consider the impact of the resumption of sequestration in the first and second quarters of 2023. All-in, we estimate we have approximately $40 million of adjusted EBITDA headwinds to overcome in 2023. These headwinds include an approximate $14 million impact from the continued shift to non-episodic patients, approximately $9 million to $10 million of incremental administrative and general costs associated with being a standalone company, an approximate $8 million impact from wages increasing at a higher rate than the net market basket update from Medicare, and approximately $8 million from the resumption of sequestration. As a reminder, both segments will not anniversary the resumption of sequestration until July 1st. Medicare pricing in the first quarter will be impacted by 2%, and the second quarter will experience an additional 1% for sequestration year-over-year. We estimate our cost per visit and cost per day will increase between 4% to 5% in 2023. As a reminder, labor represents approximately 90% of our cost per visit in Home Health and approximately 60% of our cost per day in Hospice. The impact of this increase will be felt more in our Home Health segment due to the Medicare net market basket update of 0.7% and the final rule for 2023. With a 3.8% net market basket update for Hospice, we expect to be able to offset more of the rising labor costs in that segment. Based on these factors, the conservative approach to our guidance is prudent at this time and estimate 2023 adjusted EBITDA will be in the range of $125 million to $140 million. On page 19 of supplemental slides, we provided a list of guidance considerations for 2023. The most sensitive factor within the low-end and high-end of the guidance range is the continued shift to more non-episodic patients. We expect a percent of our non-episodic visits as a percent of total visits to continue to increase. The continued progress of our payer innovation team in negotiating more improved Medicare Advantage contracts is key to our performance in 2023. Our ability to hire and retain clinical staff is also an important success factor. We've made meaningful net new hires in the back half of 2022, and with our continued focus on recruitment and retention, we believe we can grow volumes and improve productivity. As many of the Medicare Advantage contracts we negotiated in the third and fourth quarters of 2022 are not yet effective, and given our ongoing efforts to hire and retain clinical staff to meet demand, we expect our financial performance to be higher in the back half of the year than the first half. In regards to free cash flow. We currently expect to generate between $49 million and $88 million in 2023. Included in this range is the impact of increased cash interest payments in 2023, resulting from a full year of payments versus six months of payments in 2022, higher interest rates and a 25 basis point increase in our SOFR spread due to increased leverage. In October 2022, we fixed the interest rate on $200 million of our term loan giving rise in interest rates. We remain focused on maintaining financial flexibility, and we are keenly aware of our leverage. While we expect to be well within our leverage covenant of 4.75 times, we believe a more balanced approach to uses of free cash flow is prudent in 2023, and therefore, we are not providing a range for acquisitions. We continue to believe growth is an important part of our long-term strategy and will continue to evaluate acquisition opportunities in our pipeline carefully. In 2023, we plan to supplement organic growth by investing $2 million to $4 million to open 10 de novo locations. De novo locations have attractive economics and help us capitalize on growth and overlapping geographies. We plan to prioritize new Hospice sites in markets where we already have Home Health locations as the ability to co-locate Home Health and Hospice allows us to grow with minimal incremental infrastructure costs while also leveraging our existing referral sources and brand. With that, I'll turn it back to Barb.

Thanks, Crissy. To close, I'll bring you back to our momentum in 2023, with the continued progress in our recruitment and retention efforts, the progress of our payer innovation team as they sell our value proposition, in particular, our Home Health 30-day hospital readmission rate that is 400 basis points better than the national average, the progress of our Hospice operational changes and our recent reorganization that improves the alignment of our local operational and sales leadership, as well as realigning 60 sales staff back into direct sales roles. With that, I'll ask the operator to open the line for questions.

Thank you. Our first question is from Brian Tanquilut with Jefferies. Your line is open.

Hey, good morning guys. I guess, Crissy, my first question is when you gave the details on the guidance, one thing you mentioned is that it’s prone to be conservative here and you highlighted kind of like $40 million of headwinds. So, as I think about those moving parts, right, I mean, what sort of improvement is embedded in the guidance in terms of labor and in terms of pricing? I know you highlighted all the efforts there. So, just trying to gauge that level of conservatism. And what it will take to drive upside versus the guidance range? Thanks.

Yeah. So, thanks for the question, Brian. In regards to, again, the most sensitive factor in the guidance range is the steady state of episodic and non-episodic and what does that look like. It's a balance between growing visits and getting improved rates. And so, our payer innovation team is focused on that. I think Barb can comment on some of our regional prioritization and strategy in regards to the markets where we're focused and how the team is approaching that, but it really is about that balance between growing the rate and growing the number of contracts. And so, it's hard to pinpoint that most sensitive factor and give you guys a number that it's not X and Y exactly, it's going to be a balance.

Sure. I see there is a cost of about $2.5 million for strategic review on page 14 of your slide deck, along with an additional cost of approximately $9 million. Can you clarify what the $2.5 million covers? Also, regarding the $9 million cost, is that where it should be going forward, or should we anticipate more expenses, or is that the correct amount for maintaining business operations?

Yeah. So, some of those strategic review costs, Brian, those are some of the one-times such as things like rebranding costs and things that kept coming in during the quarter. So, those are one-time and are not recurring. As you think about 2023 and the standalone costs going forward, we still think that long-term, the right run rate is that $26 million to $28 million range that we've been talking about. When you think about those costs today again in Q3 and Q4, they were running at about $5 million. You can expect that to go up a little bit, kind of Q1, Q2; Q2 will probably be the most heavy quarter because that will be when we've done most of our hiring and we're still on portions of the TSA as they get up to speed. And then in the back half of the year, you'll probably see it kind of level off again to something that would equate to something quarterly in that $26 million to $28 million range.

Got it. Awesome. Thank you.

The next question is from Tao Qiu Key with Stifel. Your line is open.

Hey, good morning.

Good morning.

Barb, you talked about the steady increase in PRN staff in Hospice. It sounds like it will continue to march out this year. How much do you think that PRN mix will settle at? And could you quantify the impact for each 1% increase of that mix? How much of that could be offset by savings from agency labor?

There is a distinction to be made here. First, contract labor differs from PRN. Contract labor refers to the agency labor that comes at a significant cost above our normal staffing rate. For instance, in the fourth quarter, 5.2% of our Hospice visits were conducted by contract nurses, up from 1.7% last year. This is not the same as PRN, which consists of our hired staff. They are employed by us but work flexibly, choosing when to work. The shift from full-time to PRN addresses the nursing staff seeking more flexibility. The increase from 34% to 39% indicates that while we anticipated a drop in our vacancy rate due to positive net new hires in the fourth quarter, it remained relatively stable. This was because we adjusted our headcount to compensate for the transition of some staff to PRN, which is reflected in the 24% vacancy rate.

Yeah. Got it. You need more staff to handle the same volume. Could you discuss the nine new contracts signed this quarter and the additional nine that are in progress? What is the size of the potential beneficiary pool you could reach, and how quickly do you think you can achieve scale in that area? Additionally, could you provide an update on the pricing you anticipate for those contracts?

Sure. What we've determined is that it's best to provide you with the covered lives for the agreements that are currently effective. In the last quarter, we discussed the contracts that we had negotiated. We believe it is most relevant to focus on the member lives for those that are now effective. Out of the 18 agreements negotiated between the third and fourth quarters, nine are currently effective, covering just over 1 million lives, with seven of those at episodic rates. We will report on the covered lives for those that are effective because we have observed significant variation between the negotiation phase and the actual effectiveness, largely due to the credentialing process that needs to occur on the payer side. This can take anywhere from three to six months for contracts to be fully effective in the market.

That’s helpful. Thank you.

Thank you. Our next question is from A.J. Rice with Credit Suisse. Your line is open.

Good morning.

Hi. I see that the growth rate in your MA book is quite strong, but there are challenges related to that. On the fee-for-service side, it appears to be declining at a high single-digit rate. While I recognize there isn't much growth in fee-for-service enrollment, I am somewhat surprised that this has been happening for a couple of quarters now. Can you provide any insights into why the fee-for-service visits or episodes have dropped off significantly? It seems the decline is greater than what we're observing in actual fee-for-service enrollment.

I believe there are several factors at play here. Notably, we've observed a market shift. Specifically, MA enrollees in our markets have increased by 11%, while fee-for-service enrollees have decreased by 4.1%. Additionally, our community care program, which offers services in assisted living and senior apartments, has been effective. A strong MA business development representative can engage with an entire apartment complex, leading to a significant transition from fee-for-service to MA plans in a short span. This trend has been evident in many of our markets. Therefore, we're currently collaborating with our business development team to identify key referral sources that have both MA plans and a solid fee-for-service background. Our goal is to establish regional agreements that provide better resources to these referral sources, enabling us to grow our fee-for-service alongside our MA offerings. We're gathering insights from our field representatives to guide our payer innovation team about where we should focus our efforts for these regional contracts.

Okay. As a follow-up, could you share any additional metrics regarding the percentage of contract labor used in Q4 compared to what you anticipate for 2023? Also, is there any update on the turnover rate? Are you experiencing any challenges in managing volume due to labor shortages? Did this impact your admissions in the Home Health or Hospice segments in any way?

We are still facing staffing limitations in some branches. In the fourth quarter, we had 62 branches constrained for Home Health and seven for Hospice. Certain markets continue to experience staffing challenges. While we anticipate a return to normal merit increases in 2023, we may need to make market adjustments in areas where we struggle to fill positions. I want to note that we have seen a decrease in the use of contract labor, with Hospice being the primary user in the fourth quarter. This decrease was evident by the end of January, and we will only use contract labor in markets where we have hired and are in the process of orienting new staff. We will not approve contract labor for regular use unless we have completed hiring, as it is too costly for a clinician making individual visits.

Okay. Thanks a lot.

The next question is from Jason Cassorla with Citi. Your line is open.

Good morning.

Yeah. Great. Thanks. Good morning. Just on the Home Health front. Visits for episode, I think continuously declined over time. But I guess that downward trend looked like it accelerated a bit in the fourth quarter. So, I guess, how should we think about that visit per episode trend for 2023 as perhaps somewhat of an offset to the reimbursement in labor backdrop in Home Health?

Yeah. It's obviously something that we continue to focus on the visits per episode. The balance for us is making sure that as we manage the visits per episode and in some of our markets, we're now using the Medalogix Pulse tool, which is allowing us to have more real-time information on the patient. So, as we utilize that tool, we want to make sure we balance it in a way that we are not impacting those readmission rates because frankly that's one of our biggest values to bring to the payers. So, right now, we're comfortable where our visits per episode are. But if there's the availability as we rollout Pulse to the rest of our branches, it's something that we'll continue to work on if we can do it and manage the readmission rates.

Got it. Okay. Thanks. And then just on the Hospice front, you've dealt with some significant labor scarcity pressures this year. I know you have that 10% to 15% total admission growth target over the long-term. But just given the hiring efforts you've done throughout 2022, do you think you've more or less baseline these volume pressures in the fourth quarter and that you should be getting back to year-over-year organic admission growth next year? Or how should we think about that dynamic?

I believe that since we hired our executive in June of last year, she has spent time getting to know our markets. The new case management model was rolled out in the fourth quarter, and it required each local branch to assess whether they need to hire additional staff to effectively implement this model. We are encouraged by the positive hiring trend in the fourth quarter, which reflects our transition to this new approach. In January, we have seen a continued strong candidate pool. Our focus is on ensuring we have the necessary staffing in place, so we can return to our historical growth rates.

Okay. Thank you for the color.

Our next question is from Andrew Mok with UBS. Your line is open.

Hi. Good morning. Can you provide a bit more detail on the volume expectations embedded in 2023 guidance? And if you could parse out expectations for fee-for-service and MA volume growth in Home Health, that would be helpful? Thanks.

We don’t provide that level of detail in our guidance considerations. It’s a balance between the growth we see in our markets and the shift to more Medicare Advantage, as well as our strategy to use those Medicare Advantage contracts to reclaim more traditional Medicare fee-for-service from our referral sources. We avoid going into that level of detail because if I mention one factor and it comes in slightly differently but we still achieve our guidance, we often get criticized for it. So, we won’t discuss that in detail.

Got it. Okay. Maybe just a follow-up on standalone company costs. You quoted a year-over-year increase in the deck of $9 million to $10 million, but hoping you could give us the absolute dollar figure of standalone costs in 2023 versus 2021? And how that compares to your initial projections? Thanks.

I believe that 2023 will likely fall within the range of $26 million to $27 million. The TSA is included in this figure, and it will phase out later in the year. As we approach the second half of the year, we should see a more typical run rate landing between $26 million and $28 million. However, considering the various ramp-ups anticipated in 2023, I would estimate a range of $26 million to $27 million.

Got it. Thank you.

The next question is from Joanna Gajuk with Bank of America. Your line is open.

Hi. Thank you. I have a couple of follow-up questions. You mentioned that you do not factor in deal spending. Am I correct in understanding that you are not including incremental acquisition in your 2023 guidance?

That's correct. The opening of new locations is included in that guidance. Additionally, the acquisitions we made in the fourth quarter of 2022, amounting to $36 million, are accounted for in that number. However, there are no specific assumptions regarding acquisitions in the 2023 guidance at this time.

Okay. There was a question about visits per episode, which has decreased to 14% this quarter. It seems you might expect it to decline further since you're rolling out Pulse to more markets. Should we interpret it as possibly being lower than 14%, or are you referring to how things averaged out over the year? I'm asking if the 14.3% per episode is sustainable and how low it could potentially go before affecting quality.

What I would say is that we don't have a target, mainly due to the balance between readmission rates and visits per episode. As we grow, particularly with more therapy-intensive or rehab-intensive admissions, these typically result in higher visits per episode. It's all about finding that balance. With the rollout of Pulse, the focus is on having more real-time data. If there's an opportunity to reduce the number of visits from what Medalogix initially suggested, Pulse provides real-time updates, unlike the previous care tools that only offered a one-time snapshot. Pulse can indicate if someone needs to increase visits or if they've improved and can reduce visits. So, we don’t really have a target for the field; it's about balancing the necessary visits to maintain high quality.

If I may just another follow-up on the standalone company costs discussion. So, you're talking about $9 million to $10 million increase year-over-year. But it feels like maybe it came a little bit better than expected or maybe I wasn't already following the numbers. But I guess, previously you expect second half of 2022 to be, I guess, $16 million if we say something, but I guess it came at $10 million. So that's what I was assessing like maybe tracking better. So that's why like the $9 million to $10 million, is it sort of in line with how you were thinking three months ago about these incremental costs, or if there's any change in that? Thank you.

For the full year 2022, including the overhead allocation from Encompass Health in the first two quarters and the standalone costs for the company in the last two quarters, I estimate it to be around $17 million. The last two quarters were running at about $5 million, which is slightly better than we initially expected. This improvement is largely due to the careful ramp-up of staff, where we are being diligent in evaluating every hire to ensure the timing and alignment with our strategic review and standalone plan are appropriate. At this moment, I still believe the right range is between $26 million and $28 million, although our ramp-up has been slower than initially planned.

The next question is from Larry Solow with CJS Securities. Your line is open.

Good morning.

Thank you. Good morning, Crissy and Barb. I appreciate you taking my question. I have a couple of clarifications. The guidance range seems quite broad, particularly for the EPS range. I understand that the primary factor driving this is the shift in mix and the transition to non-episodic. Can you clarify whether the $40 million headwind you mentioned from that mix is around the mid-point of guidance, and if that figure is the main variable that could cause the guidance to fluctuate? Are there other significant factors at play as well?

Yeah. Larry. So, all of those factors that I gave are known, right, sequestration is a known factor. The fact that we're getting 0.7%, and that's not going to offset the wage rate increase, known factor. The most sensitive is that payer mix shift. And so, yes, that is the biggest factor that would put us at one end or the other of the range.

Is the $14 million figure you mentioned indicative of the mid-point of your range, or does it represent a higher headwind at the lower end and a lower headwind at the upper end? Is that a fair way to interpret it?

It's all a headwind, right? All four of those factors I called out are headwinds and the steps and levers that we pull to address those headwinds are all going to impact that. But again, the most sensitive within the range is the payer mix shift.

Can you clarify if the $5 million from the audit a couple of years ago contributed to the bottom line and if that amount is included in the EBITDA figure?

It is.

Okay. If I could ask one more question about acquisitions. It seems that this year, you're not aiming to set a specific target for acquisitions. Given your leverage at 3.5 times, can we expect this to be a quieter year, or are you planning to wait until your leverage improves a bit? How do you see that playing out? Thank you.

We believe we can still meet our business and operational goals with the current leverage and the guidance range we've provided. We recognize that leverage is increasing, and we will experience periods where, for example, in the first quarter of this year, we will see the impact of the highest quarter from 2022. Additionally, we expect that financial performance in 2023 will be better in the second half than in the first half. We are aware of these facts and are actively managing them. I want to clarify that acquisitions are not off the table, but we will be very disciplined in our approach. When an acquisition makes strategic sense and presents a good value opportunity, we will consider it. However, we emphasize that we will be careful due to the existing leverage and aim to convey a balanced message.

Got it. Appreciate all the color. Thank you so much.

The next question is from Jason Cassorla with Citi. Your line is open.

Great. Thanks for squeezing me in here in follow-up. I just wanted to ask more broadly around your thoughts on the broader competitive environment, just particularly given the labor and reimbursement dynamics across both the Home Health and Hospice spaces. I guess, just given the investments you've been making on the labor front and the referral streams, how are you thinking about your competitive positioning within your markets and the opportunities for you to take share over time? Thanks.

Sure. So, I think with the changes that we made in 2022, we are certainly feeling much better about being competitive, especially on that labor front in the local markets. It certainly is a lot easier for a branch director to have a team of full-time staff, right? You can count on Monday through Friday. So, from an operational efficiency, it's great to have a team of full-time folks. But what everyone has realized is we have to meet the employees where they are, which means not only being open to the flexibilities that we did do in 2022, but also make sure we give the tools to those local leaders to now really understand what kind of headcount do I need to have now that I have more flexible staff than I ever had before. But I do think that's allowing us to be more competitive as we've seen that candidate pool really jump in quarter four and we've seen similar in January. So, feeling good about where we are there.

We have no further questions at this time. I'll turn it over to Mark Brewer for any closing remarks.

Thank you, Chris. And thank you to everyone for joining us today. We'll remind everyone that a replay of this call will be available on our website under the investor relations page. And we look forward to speaking with everybody during our Q1, 2023 call. Operator, you can terminate the call.

Thank you. This will conclude today's conference call. Thank you all for participating. You may now disconnect.