Earnings Call Transcript - PNTG Q4 2022

Operator, Operator

Welcome, everyone, and thank you for joining us today. Here with me today I have Brent Guerisoli, our CEO; John Gochnour, our President and COO; and Jen Freeman, our interim CFO. Before we begin, I have a few housekeeping matters. We filed our earnings press release and 10-K yesterday. This announcement is available on the Investor Relations section of our website at www.pennantgroup.com. A replay of this call will also be available on our website until 5 p.m. Mountain on March 24, 2023. We want to remind anyone who may be listening to a replay of this call that all statements made are as of today, February 24, 2023, and these statements have not been nor will they be updated after today’s call. Also, any forward-looking statements made today are based on management’s current expectations, assumptions and beliefs about our business and the environment in which we operate. These statements are subject to risks and uncertainties that could cause our actual results to materially differ from those expressed or implied on today’s call. Listeners should not place undue reliance on forward-looking statements and are encouraged to review our SEC filings for a more complete discussion of factors that could impact our results. Except as required by federal securities laws, Pennant and its affiliates do not undertake to publicly update or revise any forward-looking statements where changes arise as a result of new information, future events, changing circumstances, or for any other reason. In addition, the Pennant Group Incorporated is a holding company with no direct operating assets, employees or revenues. Certain of our independent subsidiaries, collectively referred to as the Service Center, provide accounting, payroll, human resources, information technology, legal, risk management and other services to the other operating subsidiaries through contractual relationships with such subsidiaries. The words Pennant, company, we, our and us refer to the Pennant Group Incorporated and its consolidated subsidiaries. All of our operating subsidiaries and the Service Center are operated by separate, independent companies that have their own management, employees and assets. References herein to the consolidated company and its assets and activities as well as the use of the terms we, us, our and similar terms used today are not meant to imply nor should it be construed as meaning that The Pennant Group has direct operating assets, employees or revenues or that any of the subsidiaries are operated by the Pennant Group. Also, we supplement our GAAP reporting with non-GAAP metrics. When viewed together with our GAAP results, we believe that these measures can provide a more complete understanding of our business, but they should not be relied upon to the exclusion of GAAP reports. A GAAP to non-GAAP reconciliation is available in yesterday’s press release and is available in our 10-K. And with that, I’ll turn the call over to Brent Guerisoli, our CEO. Brent?

Brent Guerisoli, CEO

Thanks, Derek, and welcome everyone to our full year and fourth quarter 2022 earnings call. Before we share our results, I want to express deep appreciation to the local leaders and teams who care for our patients and residents and communities across our platform each day. Your kindness, compassion, work ethic, and commitment to excellence is the bedrock of Pennant’s operational and clinical success. We are grateful to work alongside you and partner with you in providing life-changing service. We are pleased to announce fourth quarter results that demonstrate the consistent operational improvement our local leaders and their teams achieved in the fourth quarter and throughout 2022. Collectively, our full year consolidated results reflect revenue of $473.2 million, an increase of $33.5 million or 7.6% over the prior year, and adjusted EBITDA improvement of $5.1 million or 19.5% over the prior year. In the fourth quarter, revenue increased $12.9 million to $124.7 million, and our adjusted EBITDA improved by $4.9 million or 98.3% over the prior year with adjusted EBITDA margin expansion of 3.5% over the prior year. These results reflect the success of our local operating teams, responding to extraordinary inflation and labor shortages with consistency and resiliency. Our home health and hospice leaders continued to drive solid clinical and financial results, including improvement in average star rating and hospitalization, which contributed to double-digit top line and bottom line growth. Our senior living segment experienced transformational change in 2022 as we added talented operational and clinical leaders who drove stronger results and showed increasing momentum in the fourth quarter. Demand for our high-quality senior living services has accelerated, allowing us to drive improved occupancy while simultaneously increasing revenue per occupied room, resulting in improved bottom line performance. Even with this progress, significant latent potential still remains across our businesses, and each segment is well positioned to maintain its growth story in 2023. The growth and positive momentum we experienced in the fourth quarter are representative of the steady improvement that we committed to provide and executed upon throughout the year. While we are pleased with the progress we know we can be much better and see tremendous opportunity to unlock additional value in the coming year as we live our culture and leverage our model of empowered local leadership, robust cluster accountability, and exceptional service center support. In 2023, we are enhancing our efforts to find, train and develop world-class operational and clinical leaders. Our existing talented local leaders and many more who will join us will drive improvement in four key areas. First, best in class clinical outcomes; next, improved operating margins; next, organic and inorganic growth; and finally an elevated employee experience. Ultimately Pennant is more than a healthcare company dedicated to our mission of providing life-changing service. We are a leadership company, deeply committed to creating opportunity for entrepreneurial individuals to use their unique talents and strengths to create value. Our operating model empowers these leaders to identify partners in the local community, create strategic plans relevant to their local situation and align with other cluster partners through our incentive and equity structures. Our model thrives when local leaders use their freedom within a framework of accountability to operate as owners and drive exceptional performance clinically, financially and culturally. When leaders achieve these results over an extended period, they’re awarded C level designations such as Chief Executive Officer, Chief Clinical Officer, and Chief Operating Officer. There’s a lot to accomplish across the organization, but let me be clear, developing C level leaders is my number one priority. Across the organization, we are committed to tripling the number of CEOs in our organization over the next three years. To accomplish this, we are redoubling our efforts to recruit, train and develop more world-class leaders. We are also actively improving the data, tools and resources available to our field leaders in order to drive meaningful improvement within operations clusters and markets, and to consistently focus leaders on their results in areas of improvement on their path towards a C level designation. Achieving success in this priority is paramount to our future success. As we announced in our press release yesterday, we are providing guidance for the full year of 2023. We anticipate full year revenue in the range of $503.5 million to $518.4 million and adjusted earnings per share in the range of $0.66 to $0.76. The midpoint of $0.71 represents 25% growth on our 2022 adjusted earnings and 54% growth over our 2021 results. Our 2023 guidance is informed by the burgeoning momentum in both our segments, the impacts of the home health and hospice reimbursement changes, increased costs associated with labor and other inflationary pressures, as well as the significant upside we know remains in our existing operations. With that, I’ll turn the call over to John to provide more detail on our fourth quarter operational results.

John Gochnour, President and COO

Thank you, Brent, and good morning, everyone. We are pleased to report that the fourth quarter reflected meaningful progress in both our operating segments. Turning first to our home health and hospice segment performance. Top-line revenue for the quarter of $90.7 million increased $12.8 million or 16.4%, while adjusted EBITDA of $15.5 million increased $4.3 million or 38.5% and adjusted EBITDA margin expanded 2.7% each over the prior year quarter. Our home health business continued its strong year. Quality clinical outcomes and robust accountability continue to set us apart in the marketplace, as our agencies reached an average CMS star rating of 4.3 and a real-time 60-day hospitalization rate of 12.1%, which compares favorably to the national average of 14.7%. These excellent clinical outcomes contributed to steady admissions growth as home health admissions rose 8.2% and Medicare home health admissions rose 10.6%, each over the fourth quarter 2021. Our local teams continued their focus on care planning and episode management, driving meaningful progress in delivering strong clinical outcomes while improving efficiency in an elevated cost environment. Finally, our clinical teams, service center resources and clusters collaborated to prepare for the expansion of CMS’s home health value-based purchasing program. This program will benefit providers, who can successfully drive clinical outperformance and represents an opportunity to be measured and rewarded for value in our home health programs. On the hospice side, our fourth quarter represented a strong step forward in a year that required our teams to navigate a uniquely difficult operating environment. For the full year and the fourth quarter, admissions grew 6.4% and 2.4%, respectively, each over the prior year period. The fourth quarter saw a significant improvement in hospice length of stay for the first time this year, the discharge length of stay increased nearly 10% sequentially over the third quarter of 2022. Strong admissions and length of stay improvement contributed to our fourth quarter average daily census growing 5.2% over the prior year quarter and 3.5% sequentially over the third quarter of 2022. While we are pleased with the progress we have made in our home health and hospice segment, we know our performance can be much better. By executing on the fundamentals of our business, we can improve performance. We can create a more robust ramp of hospice growth, better manage the cost and efficiency of our care delivery and continue to improve our transitioning operations. The strength and diversity of our hospice programs are reflected in our fourth quarter ADC growth as we grew census despite continued challenges in Arizona and Texas, two of our historically strongest hospice markets. As these markets rebound to historical levels and length of stay continues to normalize, we expect hospice ADC growth to ramp through 2023. Similarly, we are working to improve cost management and optimize care delivery. Our local teams are reporting out regularly on efforts to reduce direct and administrative costs while driving revenue to meet their commitments. As part of this effort, we are working hard to optimize the EMR experience for our clinical teams, as we more effectively utilize technology and data to improve episode management, utilization and productivity, while also enhancing the employee experience. Finally, we continue to realize the organic growth potential in new markets open through acquisitions completed in 2021 and 2022. In 2022, we drove improvement in these recently acquired operations and we remain focused on the significant opportunity each of these new operations represents as an engine for our 2023 growth. We are excited to report continued progress in the turnaround of our senior living segment. Over the last 18 months, we have invested extensive time and effort in recruiting and developing senior living leaders and resources, who understand our culture and have embraced the Pennant opportunity. These leaders have driven improvement in our top and bottom line performance, adjusting for divested buildings, same-store senior living segment revenue improved to $126.8 million, an increase of $12.8 million or 11.2% over the prior year, and $33.2 million in the fourth quarter, a $3.5 million or 11.8% increase over the prior year quarter. Full year senior living segment adjusted EBITDA improved to $6 million, up $4.4 million or 282% increase over the prior year and $2 million for the fourth quarter, an increase of $1.3 million or 171% over the prior year quarter. Occupancy continued its steady ramp, growing for a fourth consecutive sequential quarter and reached 78.6%, a 330 basis-point improvement in our same-store communities over the prior year quarter, and a 100 basis-point improvement sequentially over the third quarter of 2022. We achieved this occupancy improvement even as average monthly revenue per occupied room for the fourth quarter rose to $3,670, an increase of $282 or 8.3% over the prior year quarter, and $113 or 3.2% sequentially over the third quarter of 2022. While we took a significant step forward in 2022, enormous organic growth opportunity exists in our senior living portfolio. We remain focused on translating revenue improvement, the bottom line financial performance through rigorous cost management and cluster accountability, growing occupancy through improved sales practices and support, and accurately capturing and receiving appropriate reimbursement for the care we provide. As our local teams succeed in these objectives, we will create stronger operating results in the senior living space and look forward to it joining our home health and hospice segment as a growth engine for Pennant’s success. In both segments, we continue to focus on our most important asset, our people. Over the last two years, elevated turnover levels and staffing shortages have impacted our ability to grow. While the pandemic has created a role in staffing difficulties and turnover across many industries, we are ultimately responsible for creating a life-changing employee experience. And our turnover results have not measured up to the high standards we have set for ourselves. In the fourth quarter and into the month of January, we have seen signs of improvement in our labor trends. Wage inflation slowed sequentially, clinical headcount increased, and home health and hospice turnover has declined. As we continue to improve, these trends will allow us to admit and serve more patients and residents. Our local leaders and teams are committed to becoming the employer of choice in each community we serve and are resolutely focused on finding and retaining the best talent as we live our core values of customer second and love one another. Turning to growth. As we increase the quality and depth of our leadership pipeline, we expect to accelerate our growth. We see a robust pipeline of acquisition opportunities in home health, hospice and senior living across our platform and in new markets. As we find opportunities through the efforts of our local teams and our stronger relationships with the broker community, we will continue to be disciplined and diligent in executing our growth strategy, looking for opportunistic acquisitions in areas where we have healthy clusters and talented candidates in our leadership development program. We also continue to invest in de novo locations and branch expansions in markets where we meet the same criteria and have opportunity to expand our continuums of care and better serve the community. In the fourth quarter, we announced one home health acquisition, the Kenosha Visiting Nurse Association in Kenosha, Wisconsin. We are grateful to the board of KVNA, which has operated independently since 1927 for entrusting us with their nearly 100-year legacy of providing high-quality in-home care in the Kenosha area. With three of our senior living operations in the KVNA service area, the acquisition represents an opportunity to continue establishing our Pennant care continuum as we support seniors' ability to age in place by providing the skilled care they need within our senior living communities. With a talented leadership team and the support of our strong home health and hospice operations in the Milwaukee area, we are executing on a plan to quickly drive financial improvement and clinical strength at KVNA, positioning to be accretive to 2023 results.

Jen Freeman, Interim CFO

Thank you, John, and good morning, everyone. Detailed financial results for the full year and three months ended December 31, 2022 are contained in our 10-K and press release filed yesterday. For the full year ended December 31, 2022, we reported total GAAP revenue of $473.2 million, an increase of $33.5 million or 7.6% over the prior year, and GAAP diluted earnings per share of $0.22, an increase of $0.13 or 144.4% over the prior year. As a reminder, our 2022 full year guidance was total revenue of between $458 million and $462 million, earnings per diluted share between $0.55 and $0.60, and adjusted EBITDA of between $31 million and $33.5 million. Consistent with that guidance, revenue adjusted for startups and the domestic building was $464.1 million, a $38 million or 9.1% increase, adjusted EBITDA was $31.5 million, a $5.1 million or 19.5% increase, and non-GAAP adjusted earnings per diluted share of $0.57 on shares a 30.2 million, an increase of $0.11, or 23.9% over the prior year. Key metrics for the full year and three months ended December 31, 2022 include $64.5 million drawn on our revolving line of credit and $2.1 million cash on hand at quarter-end; 1.93 times net debt to adjusted EBITDA; and cash flows provided from operations of $9 million for the year and $25.8 million excluding the impact of $6.5 million of the transfer related to the divested buildings, $4.1 million in deferred FICA payments and $6.2 million in the repayment of Medicare advance payments. As we mentioned in our press release, we are providing full year 2023 guidance of revenue of $503.5 million to $518.4 million; adjusted EBITDA of $38.4 million to $42.6 million; and adjusted earnings per share of $0.66 to $0.76. Our guidance incorporates current operations and organic growth, diluted weighted average shares outstanding of approximately 30.7 million and a 25.5% effective tax rate. Our 2023 annual guidance anticipates an EPS increase quarter-over-quarter consistent with our 2022 performance and is based on a ramp in home health and hospice ADC, occupancy improvements in senior living, anticipated reimbursement rate adjustments and elevated interest rates, does not include unannounced acquisitions and excludes startup operations, share-based compensation, acquisition-related costs and onetime implementation and unusual items. Including the factors contemplated in our guidance, we are confident in our local leaders and resources across our organization that they will continue to drive the momentum that we experienced in the fourth quarter into 2023 by focusing on the things we have previously emphasized: leadership development, clinical outcomes, margin expansion and culture. We expect cash flow from operations for 2023 to reflect organic revenue growth and bottom-line improvement, unencumbered by the onetime cash outlays experienced in 2022. With increases in earnings, continued improvement in cash collections and lower capital expenditures, we expect to fund future growth. And with that, I’ll hand it to Brent to highlight a couple of our local leaders.

Brent Guerisoli, CEO

Thanks, Jen. It’s my pleasure to spotlight a few leaders in our organization, who have achieved exceptional results in 2022. Their stories reaffirm our conviction that elevating local leaders and supporting their progress to CEO will be key to our future success. As an example, newly appointed Chief Executive Officer, George Lipphardt and Chief Clinical Officer, Cassie Allmark, lead Sacred Heart Home Health in Tucson, Arizona. Sacred Heart joined the Pennant family through acquisition in January of 2021 and has improved steadily ever since. George and Cassie’s intense focus on culture and operational excellence have led to Sacred Heart becoming an employer of choice and a provider of choice in the Tucson market. They have partnered closely with our other operations in the area and demonstrated the unique value of the Ensign Pennant Care Continuum by meeting and coordinating regularly with Ensign leaders in Tucson. Their hard work, dedication and collaboration have borne fruit as evidenced by Sacred Heart’s real time star rating of 4.5, 13% 60-day hospitalization rate and by a 91% increase in revenue in 2022 versus 2021. Even more impressive, these leaders dramatically increased Sacred Heart’s margins in an inflationary environment, leading to a more than 400% increase in Sacred Heart’s EBIT year-over-year. Also in Tucson, Arizona, newly appointed CEO, Russell Sylvester and future Chief Wellness Officer, Dakova Nielsen are building something special at Sherwood Village Assisted Living and Memory Care. These leaders have helped Sherwood establish a reputation as a preferred local senior living community. Sherwood Village is known for great care and providing a welcoming and attractive environment for residents. Through Russell and Dakova’s leadership, Sherwood weathered the pandemic and never lost sight of the importance of strong culture. Throughout 2022, Sherwood gained momentum, increasing its census to pre-COVID levels to end 2022, with a census of 151 residents, and increase in occupancy from 80% in Q4 2021 to 91% in Q4 2022. Sherwood’s financial performance improved accordingly with a 78% increase in EBITDAR year-over-year. We are seeing other Arizona communities following Russell and Dakova’s footsteps, and we’re excited about the Arizona senior living market in 2023. With that, we’ll open it up for questions. Olivia, can you please instruct the audience on the Q&A procedure?

Operator, Operator

And our first question comes from Tao Qiu with Stifel. Your line is open.

Tao Qiu, Analyst

Hey. Good morning. Congratulations on the strong results this quarter and the progress throughout the year. I’m just curious about the full-year guidance. I think the guidance suggests 10% growth on the top-line and I think a 28% increase on EBITDA at the midpoint. Could you maybe unpack the various components that are driving the guidance? And second, I think the guidance also suggests a 50 basis-point improvement in adjusted EBITDA margin in 2023. Certainly, we saw the momentum of the margin expansion that should carry into 2023. But in light of the experience last year, what level of conservatism are you building to that margin assumption? Thanks.

Brent Guerisoli, CEO

Thank you, Tao. That’s a great question. I’ll give a general overview and then let Jen share specific details. We ended the year strong, particularly in the fourth quarter, and we’re optimistic about 2023. We expect a similar ramp to 2022, starting solidly but really gaining momentum in the second half of the year. Keep in mind that the first quarter can be choppy for us. Compared to last year, we’re missing the sequestration holiday, plus we’re experiencing resets of benefits and some payroll tax changes in Q1. We also have the impact of changes to home health revenue and typically see some seasonality in our census due to the holiday season, which we did notice. However, we have already rebounded and surpassed Q4 levels, which is encouraging. Generally, we are seeing real momentum as we move into the second half of the first quarter. We anticipate stable but solid revenue growth and incremental margin improvement. There are significant opportunities ahead, particularly in our senior living segment, where we believe the ramp can significantly improve. While we project conservative quarter-over-quarter growth, there are also substantial opportunities in home health and hospice for further margin improvement. Additionally, we have opportunities on the G&A side, where investments made in 2021 and 2022 during the pandemic and transition are expected to ease in 2023, allowing for improvements in percentages. Jen, do you have any additional information?

Jen Freeman, Interim CFO

Yes. To provide more details, we have included some inflation in the cost of service projections, expecting up to a 5% improvement in margins through additional creative growth. We anticipate a slight improvement in the cost of service. Additionally, we've experienced some rent improvements as a percentage of revenue in the senior living segment. However, on the home health and hospice side, we are forecasting a 0.8% decrease in our home health reimbursement, which we have accounted for in our cost of service considerations. Our focus is on margin improvement through operational efficiencies, caregiver productivity, visit utilization, and EMR optimization. Furthermore, as mentioned, our general and administrative expenses did decline as a percentage of revenue in the fourth quarter, and we expect G&A as a percentage of revenue to decrease year-over-year.

Tao Qiu, Analyst

And my second question is on the hospice side. I think the average length of stay was adversely impacted by the shifting referrals during 2022. But we saw that bounce back quite strongly during this fourth quarter. You talked about the ramping in Arizona and Texas; could you maybe talk about efforts you make there, any changes in referral sources you’re currently seeing?

John Gochnour, President and COO

Yes, I'm happy to address that. We are very pleased with the fourth quarter performance in terms of our census, especially with the increase in length of stay, which rose by about 10%. This improvement is seen across the board. Looking ahead to 2023, we anticipate further normalization as we continue to receive more referrals from our community sources, which is great news. We still have the chance to return to pre-pandemic figures, particularly with our senior living and skilled nursing partners, where we historically had a higher influx of patients. As their census grows, we expect that this will normalize as well. Additionally, we can identify hospice needs sooner in those settings, which typically leads to longer lengths of stay for patients from those facilities. We're excited about the admissions data indicating that the community is considering us as a primary referral source, notably from hospitals, a trend that emerged during the pandemic. We do not foresee significant changes in this regard and see growth opportunities as our facility partners' census improves. We highlighted Arizona and Texas as important markets, where we previously experienced declines in census due to leadership transitions and other factors. The good news is that we have a strong leadership team focused on restoring these markets to their historical performance levels. Therefore, we expect to see a return to previous performance in those areas, alongside continued growth in our markets in California, the intermountain west, and the Pacific Northwest, all contributing to the normalization of length of stay, which we believe will enhance our hospice average daily census.

Tao Qiu, Analyst

If I may, squeezing one more question on senior living. I think the rate growth was pretty strong year-on-year as well as quarter-on-quarter. I think some of your competitors called higher levels of move-outs because they’re pushing rates. Did you guys get any pushback from your resident base? And I think also in 2022, the cost of services in senior living benefited from a $4.2 million state relief fund. I assume some of the support on the Medicaid side will probably stay in place in 2023. Could you maybe comment on government support on the public health emergency and what level of support do you anticipate in your guidance? Thank you.

Brent Guerisoli, CEO

Certainly. I'll begin with your question about provider relief. We've received confirmation of funding across most states for provider relief, ensuring it will remain available through 2023, though 2024 is still uncertain. The only state where we haven't received confirmation is Idaho. However, we've partnered with the state and other programs, which has positively impacted our performance there. We expect the same level of impact in 2023 as we saw in 2022. Regarding price sensitivity and our occupancy incentives, we've noticed that we've started from a catch-up position. Our pricing is competitive in most markets, and as we've gradually raised rates, we've experienced significant gains in occupancy, which we expect to continue. We plan to maintain our rate increases while ensuring that we are appropriately reimbursed for the services we provide. We do anticipate that while there will be continued increases, the pace may slow down as prices reach a certain threshold. Nevertheless, we believe there is still considerable potential for rent increases throughout the year, just not as aggressively as in 2022.

Operator, Operator

Thank you. One moment please for our next question. And our next question coming from the line of Scott Fidel with Stephens. Your line is open.

Scott Fidel, Analyst

Hi, great. Hi, everyone. Wanted to maybe just follow up on that last discussion point just on the SL business and thinking about rate and occupancy in 2023. And would be interested in terms of what you are building into your outlook in terms of the rate increases, and then occupancy sort of trend that you are factoring into the guidance?

Jen Freeman, Interim CFO

Yes. Overall, we are anticipating approximately a 10% increase in top-line growth for our senior living business. The distribution of this growth will comprise about 2% to 3% from rate increases and 7% to 8% from improved occupancy. This will also lead to additional growth in our margins.

Scott Fidel, Analyst

Okay, great. That’s helpful. And then also just on the outlook for cash flows. And it sounded like, Jen, your qualitative commentary was pretty positive around normalization in operating cash flow. Just interested as well if you could quantify that for us in terms of what you are factoring in for operating cash flow and then for CapEx as well?

Jen Freeman, Interim CFO

Yes. I'll begin with the last question about capital expenditures. We invested in capital expenditures in 2022, and we anticipate that amount will decrease to between $8 million and $10 million in 2023. In relation to that, we expect our cash flow to improve because we won’t have the one-time costs we faced in the past couple of years. The advance payments for the FICA deferral have all been repaid, and we also had a $6.5 million payment related to the divested community. With those costs excluded, we are looking at $25.8 million in operating cash flow. We expect that as we enhance our margins and bottom line growth, our cash flow will continue to improve year-over-year.

Scott Fidel, Analyst

Understood. So, it definitely looks like there should be some solid improvements in free cash flow. And then, just if I could sneak one last one and just on the margin side. And I know you touched on some of the drivers of the margin expansion across the business and just called out SL. For example, interested just within HH&H how you are thinking about margin progression, just given the sort of flat to slight rate reduction in home health. Interested if you’re assuming that you’re going to have margin expansion in home health despite that or whether margin expansion is more weighted towards hospice and in SL in 2023? Thanks.

John Gochnour, President and COO

We appreciate the great questions. The margin expansion we discussed applies to all three segments. While we do expect a slight decrease in home health Medicare revenue, this will be somewhat balanced by our ongoing growth in commercial relationships and our efforts in clinical optimization through our EMR, which should lead to better productivity and a sustained focus on visit utilization and episode management. We've made significant progress in these areas over the last few years and will continue to do so, aiming to provide care as efficiently and effectively as possible. Although there is a slight decline in home health Medicare revenue, we believe we can maintain the growth we have experienced. We are striving to be the preferred provider in the communities we serve, and our admissions remain robust on both the Medicare and commercial sides, which helps mitigate the impact of the projected revenue decrease through increased volumes. In terms of overall margin expansion, we will continue to address employee turnover, which has risen by about 25% over the last two years. Reducing that back to pre-pandemic levels presents a real opportunity for margin expansion. We also see potential for growth from the new transitions, as we acquired numerous businesses in 2020 and 2021. Although acquisition activity slowed in 2022, each of these businesses still offers significant growth potential, contributing to the margin expansion we observed. We believe there are continued opportunities in this area to achieve the margin expansion outlined in our guidance.

Operator, Operator

And our next question coming from the line of Ben Hendrix with RBC Capital. Your line is now open.

Ben Hendrix, Analyst

Thank you. I have a quick question regarding hospice. I appreciate the details on length of stay and census. However, regarding rates, one of your competitors mentioned a significant rate update for fiscal '24 that could affect the third quarter of this year. I'm curious about your expectations for rate progression in hospice by the end of the year. Thank you.

Brent Guerisoli, CEO

Yes. So, we take the approach of including what’s known in the guidance. And so we did not bake in any significant increase above the 3% adjustment from the 2023 final rule. And so, that also represents potential upside for us.

Operator, Operator

Thank you. And I’m showing no further questions at this time.

Brent Guerisoli, CEO

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

Operator, Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.