Good morning, everyone, and welcome to Enhabit Home Health & Hospice's First Quarter 2024 Earnings Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Crissy Carlisle, Enhabit's Chief Financial Officer. Crissy, you have the floor.

Thank you, operator, and good morning, everyone. Thank you for joining our call today. With me on the call is Barb Jacobsmeyer, President and Chief Executive Officer. Before we begin, if you do not already have a copy, the first quarter earnings release, supplemental information and related Form 8-K filed with the SEC are available on our website at investors.ehab.com. On Page 2 of the supplemental information, you will find the safe harbor statements, which are also set forth on the last page of the earnings release. During the call, we will make forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties that could cause actual results to differ materially from our projections, estimates and expectations are discussed in our SEC filings including our annual report on Form 10-K, which are available on our website. We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information and the earnings release. With that, I'll turn the call over to Barb.

Thanks, Crissy. Good morning, and thanks for joining us. Our strong start to 2024 is a result of our team's continued focus on our operational strategies, additional frontline clinicians, more and better home health payer contracts, and controlling G&A expenses were the key drivers of our performance in the first quarter and resulted in sustained consolidated adjusted EBITDA of $25.3 million, in line with last year's first quarter results. As our employees stated on our recent employee survey, their engagement is driven by the knowledge that our work is meaningful. No matter the role, clinical or support staff, they recognize that what they do impacts our patients' lives. During this celebration of Nurses' Week, I especially want to thank each and every one of our nurses for their dedication to our mission and to our patients and families. Enhabit's high-quality outcomes are a result of our employees' hard work, and I'm proud of our entire team. In our Home Health segment, we are focused on achieving growth through stabilization of Medicare admissions, continued progress with our payer innovation strategy, and increased utilization of our clinical resources. With our traditional Medicare mix of Home Health revenue now in line with peers, we are experiencing stabilization of our fee-for-service Medicare mix. While year-over-year fee-for-service Medicare admissions declined 11.4%, we experienced a sequential increase of 3.4%. Our payer innovation team continues to do a great job building our portfolio of payer contracts, and our field teams are successfully shifting emissions out of historically lower paying contracts to these new contracts at improved rates. Contracts that acknowledge the high-quality care we provide to the payers' members. Admissions in our historically lower paying contracts declined from 42% of our total admissions in quarter 1, 2023 to 29% in quarter 1 this year. As these results show, our payer innovation strategy is working. We continue to be disciplined in our approach with payers as we work to negotiate new agreements and remain focused on moving volumes away from the lower paying agreement. We are committed to the renegotiation of historic contracts to improve rates while holding firm to our conviction in the value we provide, and we will make the decision to terminate agreements when necessary. Finally, in both our Home Health & Hospice segments, our teams are focused on ensuring that the intensity of care aligns with patient acuity and complexity of care needs within the important context of what matters most to patients in their journey. Staffing challenges and the increased demand for our services have created a mandate for us to effectively manage clinician visits. However, our strategy is not to simply reduce visits across the board, but instead to effectively rightsize each plan of care to ensure patients receive a just-right care plan. For some, this means fewer visits; for others, it may mean more depending on their unique presentation. Overutilization and underutilization are equally harmful to our patients and our business. Additionally, some patients can benefit from virtual encounters, which is convenient and efficient for our agencies and our patients who are beginning to understand and enjoy the benefits of tech-enabled care. We continue to explore how implementing virtual care in a strategic manner can benefit both service lines as well as the patients and families we serve. We plan to expand the scope of virtual care at Enhabit in 2024 in an effort to improve efficiency, capacity, patient outcomes, and patient experience. Medalogix Pulse supports our visit optimization strategy for our Home Health team, and Medalogix Needs supports the strategy for our Hospice team. Leveraging predictive analytics bolsters our ability to deliver a better way to care for patients and families in a more efficient manner without compromising patient outcomes. Our competitive position in terms of patient outcomes, including hospitalization rates and visits at the end of life, is what sets us apart when negotiating with payers and establishing strategic referral relationships. In our Hospice segment, our priority is growing census, which will allow us to gain operating leverage against the fixed cost structure associated with the case management staffing model. Our sales headcount is now above last year's count, and we are focused on utilizing data from our loss loyalty reports to strengthen relationships with referral sources. In addition, we are working with our talent acquisition team to continue to recruit additional business development team members to grow the business. To complement our organic growth strategy in both segments, we continue to strategically reinvest for growth through our de novo strategy. This allows us to enter a new market with low capital costs. We added 2 Hospice de novo locations in the first quarter, and the work is underway to open 10 more de novos in 2024. A critical key to our organic and de novo growth is our people strategy. We were pleased with our recent employee engagement survey, which saw a Net Promoter Score in the top quartile of healthcare companies. We are seeing continued success with our recruitment and retention efforts. During the first quarter, our full-time nursing candidate pool increased 30% year-over-year and resulted in the addition of 151 net new full-time nurses.

Thanks, Barb. Consolidated net revenue was $262.4 million for the first quarter, down $2.7 million or 1% year-over-year. Our strategy to increase admissions and payer innovation contracts lessened the impact of mix shift contributing to sustained consolidated adjusted EBITDA of $25.3 million in both the first quarter of 2024 and 2023. Before I move into the results of our Home Health segment, I want to mention the reporting change we made in the first quarter. With an advanced episodic model added to our payer innovation contract effective January 1, 2024, we have updated how we report volume and pricing metrics for our Home Health segment, separating traditional Medicare from all other payers. The prior periods were changed to conform to the current period presentation and had no impact on the consolidated financial statements. In our Home Health segment, we experienced strong growth in Medicare Advantage admissions and, as Barb discussed, stabilization of Medicare admissions. Year-over-year, non-Medicare admissions grew 25.2%, driving total admissions growth of 5.3%, with 5% growth on a same-store basis. This is the strongest same-store growth we've experienced post spin-off and proof that our payer innovation success will drive positive results. 38% of non-Medicare visits are now in payer innovation contracts at improved rates. This is lessening the financial impact of mix shift to Medicare Advantage. During the first quarter of 2024, the shift to more non-Medicare admissions reduced revenue and adjusted EBITDA approximately $2 million on a net basis. That $2 million is comprised of approximately $6 million of negative impact from the mix shift, offset by approximately $4 million in non-Medicare pricing improvement. Home Health adjusted EBITDA decreased $1.1 million or 2.5% year-over-year as the mix shift and increased cost of service were offset by a reduction in general and administrative expenses. Cost per visit increased 2.3% year-over-year, primarily due to merit and market rate increases. General and administrative expenses decreased $3.4 million or 5.4% year-over-year, primarily due to a new organizational structure implemented in the first quarter of 2023 to align our sales and operations team. In our Hospice segment, revenue decreased $0.1 million or 0.2% year-over-year and increased Medicare reimbursement rates were offset by a decrease in patient days. Admissions decreased 2.9% year-over-year, while average daily expenses decreased 3.7% year-over-year. Sequentially, Hospice admissions grew 5.6% over the fourth quarter of 2023. We saw a sequential decline in average daily expenses throughout the fourth quarter of 2023 followed by a sequential increase in average daily expenses each month of the first quarter of 2024 that persisted into April. As we continue to ramp up our business development team and balance our referral portfolio, we expect average daily expenses to grow throughout the remainder of the year. Adjusted EBITDA in that segment increased $0.6 million or 7.1% year-over-year primarily due to a decrease in general and administrative expenses. Cost of service continued to approximate $24 million per quarter. In terms of dollars, we were able to keep costs relatively flat as we have now anniversaried the implementation of the case management staffing model and we were able to offset the increased costs associated with the new durable medical equipment arrangement as we discussed during our fourth quarter earnings call with the savings that resulted from the elimination of contract labor. We continue to expect patient volumes to increase without the need to hire a significant number of additional staff resulting in operating leverage against the fixed costs associated with our case management staffing model. General and administrative expenses declined year-over-year primarily due to the restructuring of Hospice back-office staffing in the third quarter of 2023. Our Home Hospice general and administrative expenses decreased $0.5 million year-over-year to 10.3% of consolidated revenue. By the end of the first quarter, we fully transitioned off the Encompass Health transition services agreement. Let's transition now to the balance sheet. We ended the first quarter with a leverage ratio of 5.3x, well within our covenant maximum of 6.75x and less than our year-end 2023 leverage of 5.4x. We have available liquidity of approximately $70 million, including approximately $37 million of cash on hand. We believe this is adequate to support our operations, including our de novo strategy. We generated approximately $19 million of free cash flow during the first quarter of 2024, which equates to a free cash flow conversion rate of approximately 74%. This conversion rate includes the positive impact from the timing of payroll in the quarter. Let's turn now to guidance. We feel good about our consolidated results for the first quarter and remain confident in our outlook for 2024. We maintain our 2024 guidance that includes a range for net service revenue of $1,076 million to $1,102 million with adjusted EBITDA in a range of $98 million to $110 million. We continue to expect to generate $36 million to $62 million of free cash flow in 2024.

Before we open the lines for Q&A, as it relates to our strategic alternatives process, as announced yesterday in a separate press release, after the evaluation of a full range of strategic alternatives with the support of external financial and legal advisers, our strategic review process has concluded. There was serious interest based on parties' engagement in the process. However, the company did not receive any formal proposals for our transaction. We believe this is largely due to macro headwinds, including, among other things, uncertain regulatory developments including Medicare reimbursement policies throughout the healthcare industry and an evolving anti-trust landscape, a difficult healthcare and operating environment, and persistently high interest rates. Considering this and other strategic alternatives reviewed with the advisers during the review process, the Board determined the best way to enhance shareholder value at this time is to continue to operate as a stand-alone business. The Board and management team remain focused on operating our core businesses and our financial and operating results. The Board will continue to be open to and consider all opportunities to enhance shareholder value. I want to remind everyone that the purpose of today's call is to discuss our financial and operational results, and we will not be taking any questions regarding the strategic review or any other topic. Operator, we're now ready for the lines to be open for questions.

Our first question comes from A.J. Rice at UBS.

Maybe on the cost per visit increase, obviously, a 2% to 3% increase is what you've guided for, and you seem to be running at that. I'm assuming your underlying salary wages and benefits are running at least 3% to 5%. I think business per episode were slightly down 1/10 of a day. It would look like looking at the peers that maybe you've got some more room there. But can you just comment on the dynamics? What's offsetting those labor cost trends if indeed, I'm right about roughly where they're running? And how much more opportunity you might have on the driving down visits per episode over time?

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

We previously piloted visits per episode in 17 branches for an extended period. Currently, we have completed the rollout to all our branches by the end of the third quarter. Our status now mirrors what we experienced during the pilot in those branches, which involves implementing the rollout and ensuring that leaders are effectively using the visit utilization recommendations. This allows us to transition from lower intensity to higher intensity patient needs. We recognize that there is still room for improvement in managing business per episode, which reflects our situation during the pilot in those 17 branches.

Okay. Maybe a follow-up then on your resegmentation of your Home Health segment to include the non-Medicare segment, which obviously encompasses MA episodic with relatively high margins, and may provision with lower margins. These are two items that have quite different gross margin profiles. How should we consider the gross margin of that segment moving forward, and what is the expected trend?

Yes. When we consider the reporting for Medicare and non-Medicare, we believe it resembles a peer-like structure, making it more comparable to historical data. Our disclosures provide sufficient information, allowing you to understand that the non-Medicare number includes episodic care. You can easily determine the non-Medicare revenue and total visits, and analyze it on a per visit basis to evaluate the rate trends. You can also observe the progress we've made in our rates compared to last year. Overall, this presentation likely simplifies modeling since you only need to focus on two categories: traditional Medicare and non-Medicare, rather than three separate sets.

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

A.J. was just on operator.

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

Could you provide some clarification on the payer innovation aspect, particularly regarding the pricing of visits? It seems that non-Medicare revenue per visit increased by about 4% year-over-year. Payer innovation visits rose by $190,000, while non-payer innovation visits decreased by nearly $100,000. Can you help us understand the factors affecting non-Medicare revenue per visit? This suggests that payer innovation visits in this quarter may not have been reimbursed significantly higher than the previous model. Any additional insights on payer innovation and revenue per visit within non-Medicare would be very helpful.

Yes. Jason, one of the things that we have to be very careful of is these national agreements prohibit us from discussing the details around those agreements. And so given that we have the one large national agreement that is an advanced episodic model, if we get too far into the details, that's not going to be good for the other party. So we have to be very careful of that. And that's part of the reason, again, that we did make the decision to go with Medicare and non-Medicare. I can tell you that the historic statements we've made around episodic pricing, and the discounts as a whole, we're still in that kind of 0% to 25% to 30% discount, and that is far better than the 35% to 40% discounts that we have historically seen before we had our payer innovation team.

Okay. Fair enough. There’s a follow-up regarding the declines in Medicare episodes. You’ve mentioned before that the lack of MA contracting was an obstacle with referral sources. What’s the current update on that? Is there increasing momentum from the national contract that started this year? Should we expect to see Medicare episode declines aligning more closely with your market trends at this point? Any updates would be helpful.

Sure. So when we look at kind of that quarter 3, quarter 4, quarter 1, we have shown the stabilization of those Medicare admissions. We do think that being on more of the payer contracts has helped us with that. But to your point, we just started gearing up the new national MA. So I do think that will continue to help us be seen and has helped us be seen as a stronger provider to our referral sources. So the goal is to continue to receive a very healthy payer mix from our referral sources.

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

It's Jack Slevin on for Brian. I appreciate all the color on the review and don't want to dig into the details there. But maybe just taking a step back and as you think about strategic priorities going forward, coming out of the review, do you think there's any change there? Or are the sort of pillars of what you're trying to drive towards still the same?

I think the pillars are still the same. I do think that there are some things that we are going to be focused on from an innovation standpoint. We do now have our own data warehouse as we transition completely off of Encompass. So I think that's now going to allow us to have our own data to build our business intelligence tools. So there will be some focus on using some of that to help us as we look at things like intake, workflow, and other tools to help our team in the field.

Got it. Okay. That's really helpful. And then, Crissy, maybe just thinking about the balance sheet cash generation looks pretty solid in the quarter. Can you just speak to sort of what the pathway is to delever and sort of how you're thinking about that on the multiyear look?

Yes, sure. So stabilization of EBITDA and the required amortization of the term loan are expected to help us to continue to delever in 2024. One of the biggest factors in that deleveraging from Q4 to Q1 was the fact that EBITDA stabilized. We continue to have strong free cash flow, as you mentioned, that allows us to make payments beyond the required amortization, which also results in lower interest expense, which in turn generates more free cash flow. So we believe we're getting ourselves into a good cycle now that EBITDA has stabilized. We fund operations without drawing on revolver. I want to remind everyone that we have only drawn on that revolver once in the fourth quarter of 2022 when we had over $50 million of stacked payment related to acquisitions and the deferred payroll tax from COVID. So we like where we're headed. I think one way to think about it is if you historically target a 50% free cash flow conversion, and then you have the EBITDA guidance range. That's how you can think about the cash flow we have to delever. We consider $2 million or $3 million of that free cash flow for de novo. And then the priority, of course, would be to use the rest for debt reduction.

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

So I guess the follow-up here on your guidance, right? So how was the quarter versus your internal? You said you kept your guidance. The range is pretty wide. So any update on your view around the variability between the low and the high end of the range?

I would say that there's no real update at this point, Joanna. As we've mentioned previously, we think we're starting the year in a much better sense with those 2 national agreements that have better rates and that can help us be a better resource to those referral sources. The key assumptions in the range continue to be Medicare as a percent of total Home Health revenue, the shift to the payer innovation contracts, and then just Hospice patient days growth. And I think we covered all of those in our comments. In regards to the cadence, Q1 and Q4 tend to be our strongest quarters in regards to volume because that's when patients are the sickest. They follow on the eye or they have flu-related symptoms and such and need our care. Q2 and Q3 do tend to be impacted a little bit by pay time off vacation, both of our staff as well as our referral sources. And we think that, again, we're in a better position this year to manage through at least the CEO portion of our staff based off the success that we've had with recruitment and retention of our clinical change; we've been reporting over 100 net new nursing hires for several consecutive quarters now. And so again, we feel good about our ability to change that trend going forward, and that will have a moderate EBITDA build throughout the year.

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

We are continuing to negotiate and work on new contracts, with a strong emphasis on renegotiating existing ones. The new contracts we established with payer innovation since 2022 are not yet due for renegotiation. Our current focus is on one large national plan and several smaller regional plans that were acquired over time. When we renegotiate, we approach it similarly to how we do with new plans, aiming to secure an episodic agreement when possible. If that's not feasible, we look to improve the per visit rate. I want to emphasize that we are committed to maintaining our threshold of no more than a 25% to 30% acceptance rate. It's often simpler for our business development team to communicate that we are not in contract than to agree to unfavorable terms. With the strong contracts we have built recently, we are in a better position to be firm with legacy contracts.

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

Sounds like the candidate and nursing pool is, I think, Barb, you might have said up 30%, which is good. I guess, how to think about other types of clinical support like therapists or any of the like?

Sure. I would say we are back into really working to recruit therapy now that we have built out more of the frontline nursing to grow. We do need to add some therapy physicians. Overall, we did well from a therapy recruitment and retention. There are some key markets where it is more difficult, tends to be more of your rural markets that don't have a lot of therapy pools around the area. So those areas are the ones that we focus on to see if there's other ways that we can encourage to get the candidate pool. But when we look at it from a national level, we do well on therapy recruitment and retention.

Great. I had a little trouble getting into the call. It seems like AR was up a bit. Crissy, I think you mentioned in the fourth quarter that there were some timing impacts, but it looks like it increased by about $10 million sequentially. Was there any impact from the disruption related to changes or anything else worth mentioning?

Yes. While Change is not our primary clearing house, and we don't directly use them, some of our payers do. And so we did have a period of about 30 days where payment delays resulted from the Change Health incident. We are getting those payments just not as quickly as usual. And some of them are coming in via hard copy set versus some of the automated methods as well. The other increase that we're seeing is just, again, as Medicare Advantage continues to grow, Medicare Advantage does take longer to build and collect. There's just an administrative burden associated with it. But we do have some things underway with our revenue cycle strategy and team and expect to see some movement on that in the coming quarters.

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

If you have additional questions, please email [email protected]. Thank you again for joining today's call.

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