Good day, and thank you for standing by. Welcome to the Pennant Group Second Quarter 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kirk Cheney, Executive Vice President. Please go ahead.

Thank you, Didi. 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 Lynette Walbom, our CFO. Before we begin, I have a few housekeeping matters. We filed our earnings press release and 10-Q 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 5:00 p.m. Mountain Time on August 6, 2026. We want to remind anyone who may be listening to a replay of this call that all statements are made as of today, August 7, 2025, and these statements will not be updated after today's call. Also, any forward-looking statements made today are based on management's current expectations 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, we do not publicly update or revise any forward-looking statements where changes arise from new information, future events or for any other reason. In addition, the Pennant Group Inc. is a holding company with no direct operating assets, employees or revenues. Certain of our independent subsidiaries, collectively referred to as the service center, provide administrative services to the other operating subsidiaries through contractual relationships. The words Pennant, company, we, are and us refer to the Pennant Group, Inc. and its consolidated subsidiaries. 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 do not imply that the Pennant Group, Inc. 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-Q. And with that, I'll turn the call over to Brent Guerisoli, our CEO. Brent?

Thanks, Kirk, and welcome, everyone, to our second quarter 2025 earnings call. Building on a robust first quarter, we are pleased to report continued strong results and momentum across each of our service lines. Our positive performance reflects the consistent effort we have applied to every aspect of our business through our 5 key focus areas: leadership development, clinical excellence, employee engagement, margin and growth. We have been talking about these initiatives on our earnings calls for many quarters, and these focus areas continue to be the catalyst for relentless improvement. In Q2, we generated revenue of $219.5 million, an increase of $50.8 million or 30.1% and adjusted EBITDA of $16.4 million, an increase of $3.2 million or 24.5% each over the prior year quarter. We are operators. We have succeeded and continued and continue to perform in all kinds of environments through inflation, reimbursement cuts, a global pandemic, regulatory changes, multiple presidential administrations, market disruptions, emerging payer trends and more. Through it all, we have grown and thrived and created more and more opportunities for local teams to build amazing operations that benefit their communities, residents and patients. At this moment, CMS' misguided and counterproductive 2026 proposed home health rule has generated negative investor sentiment about home health. We agree that the proposed rule is seriously flawed, and we are engaged in an urgent effort to improve the final rule. But we would also urge you to dig beneath that narrative and examine the strength of our home health operations and the diversity of our business. Despite years of flat or modestly negative rate updates, our home health business has continued to grow organically and by acquisition. Our hospice service line continues to achieve record-breaking success. Our senior living operations are now in a much stronger position and have…

Thank you, Brent, and good morning, everyone. Pennant's local leaders continue to drive inspiring clinical and operational results across the organization. Our results reflect strong organic growth even as we onboarded a record number of new operations. In our Home Health and Hospice segment, our excellent clinical and cultural performance continues to translate to record financial results. Top line segment revenue in the second quarter was $166 million, an increase of $40.7 million or 32.5% and adjusted EBITDA was $25.5 million, an increase of $5.9 million or 29.9% each over the prior year quarter. While we are pleased with these strong results, we continue to see opportunities to drive improvement in each of our 5 focus areas that will help us realize the extraordinary potential inherent in each of our operations. On the hospice side, we continue to see strong progress and growth. Hospice revenue was $73.8 million, an increase of $14.4 million or 24.3% over the prior year quarter. Hospice admits increased 14.7%. Average daily census increased 21.4% and revenue per day increased 3.3% each over the prior year quarter. Our mature operations continued to expand and deepen their impact in their communities as same-store admissions grew 4.5% and ADC increased 6.6%, each over the prior year quarter. These results demonstrate the alignment inherent in our unique operating model as operators drive significant growth in our mature portfolio even as they help support acquisitions and transition new operations. While our hospice results are strong, as described in our last call, our results continue to be impacted by hospice cap expense at a limited number of operations in California. As we continue to make progress in resolving these exposures, the underlying strength of our hospice performance will be more evident. While overall cap expense remains elevated, we are pulling the…

Thank you, John, and good morning, everyone. Detailed financial results for the 3 months ended June 30, 2025, are contained in our 10-Q and press release filed yesterday. For the quarter ended June 30, 2025, we reported total GAAP revenue of $219.5 million, an increase of $50.8 million or 30.1% over the prior year quarter. GAAP diluted earnings per share of $0.20 and adjusted diluted earnings per share of $0.27. Our year-to-date results put us on pace to exceed the top end of our full year guidance. Accordingly, we are revising and raising our full year 2025 guidance as follows: Full year total revenue is anticipated to be between $852.8 million and $887.6 million. Full year adjusted earnings per diluted share is anticipated to be between $1.09 and $1.15 and full year adjusted EBITDA is anticipated to be between $69.1 million and $72.7 million. This updated guidance incorporates current operations and organic growth, diluted weighted average shares outstanding of approximately 35.7 million and a 26% effective tax rate. This guidance includes additional expenses in anticipation of the transaction with UnitedHealth Group and Amedisys, but no additional earnings because of the uncertainty surrounding the timing of our closing on that transaction. The guidance assumes, among other things, reimbursement rate adjustments and no unannounced acquisitions. It excludes the tax- affected cost startup of start-up operations, share-based compensation, acquisition-related costs and gain loss on disposition of assets and impairments. As Brent mentioned earlier, we will issue additional 2025 guidance updates that will reflect the impact of the UnitedHealth Group Amedisys transaction in the coming weeks. Key metrics for the 3 months ended June 30, 2025, include $41.2 million drawn on our revolving line of credit and $14.4 million cash on hand at quarter end, 0.38x net debt to adjusted EBITDA and cash flows…

Thanks, Lynette. Before we transition to questions, I want to thank our employees whose daily efforts create the results we share on these calls. You are vitally important work truly changes lives and makes the world better. With that, we'll open it up for questions. Didi, can you please instruct the audience on the Q&A procedure?

[Operator Instructions] And our first question comes from Ben Hendrix of RBC Capital Markets.

Great. I appreciate the comments on the United Amedisys deal. Given the color that you just provided and the concentration of assets you expect to enter into Tennessee, I wonder if you could give us a little background on how you view the Tennessee market, how you view the payer landscape there? And then on the provider side, just how you -- to what degree did the Ensign Pennant Care Continuum relationship you have already established in the West influence your decision there and what kind of benefits that could bring?

Well, thanks for the question, Ben. And I think you hit the nail on the head a little bit in why we were so interested in the Tennessee portion of this divestiture. We believe the Tennessee market is unique, that there's an immense amount of talent in our industries in that particular state and in the region. And we're excited about the Alabama and Georgia assets as well and having a foothold in those regions. But we're really excited about the scale that we will have in Tennessee and the opportunities it will give us to impact that care continuum, interact with payers and become a resource to the communities in that state. I think one of the things that was attractive was that Ensign had recently entered the state. Obviously, we share DNA and our operating model. We use the same principles. And they've seen -- they found Tennessee to be a very successful state and a state that has a need for quality providers. And so one of the things that we find advantageous is the opportunity to build an Ensign Pennant care continuum in Tennessee. But overall, we're just excited about the deal. We're excited about how it positions us with a center of strength from which we can grow in the Southeast. And we believe that these are high-quality assets that are making an impact in the community and most importantly, that have great teams that deliver high-quality care to their patients.

Great. And just a follow-up on your comments around the proposed clawback in home health. I appreciate the commentary that it really directly impacts 18% of the business. But I was just wondering what's the potential for a clawback of that magnitude to trickle through some of your capitated relationships with managed care payers.

Yes. So any time we face an adjustment from a Medicare rate perspective, it affects both traditional fee-for-service Medicare and then any of our contracts that are managed Medicare or commercial contracts that are capitated at a percent of the Medicare rate. And so there is modest potential for that also to affect some of our commercial revenue. What I would say is we still have a variety of levers that we can pull as we seek to offset these cuts. And I think we highlighted some of them in the call. We're a diversified business. Our hospice business continues to grow and thrive. Our senior living business has just produced extraordinary progress over the last few quarters. And so we look at it and we see -- we continue to believe in home health. We think that those services are essential to the continuum of care and that reimbursement, while cyclical, will end up providing the reimbursement that's necessary to ensure that those services are delivered to patients. And so that's really the -- our belief is that there's impact from this rule that stretches across our traditional fee-for-service business and through some of our capitated contracts, but that we have opportunities to, one, affect the actual implementation of the final rule through the advocacy efforts that I mentioned; and two, that we've got opportunities operationally to deliver care more efficiently and effectively across our diversified business.

And our next question comes from David MacDonald of Truist.

A couple of questions. First, I just want to start actually in the senior living business. Can you talk a little bit just about the ongoing strength in revenue per occupied bed? I mean you guys have been driving that metric for a number of years now. And looking at occupancy, obviously, demand is pretty meaningful. But can you just talk about the sustainability of that? And longer term, should we think about that being more kind of a mid-single digit? Or just any commentary there?

Yes, David, it's a great question. we have spent a significant amount of time really focusing on revenue quality. And we've talked about it a little bit in past calls that part of the reason there was kind of flat occupancy growth is because of sort of the challenge or the efforts to make sure that the revenue quality that's coming in is offset by sort of transitioning or getting to a better point of strength from a RevPOR standpoint. So overall, those efforts have paid off. And the other thing is we are also really focused on providing a better experience in each of those communities. And so it's just been a really positive experience overall, I think, and that's a reflection of that increase over time. We have seen double-digit growth. It's tapered down to high single digits. The number that you reflected in the mid-single digits, that's kind of what we anticipate on an ongoing basis. But we also are encouraged by the short-term growth that we saw sequentially from our same-store occupancy growth, and we anticipate that our occupancy will continue to grow as well.

Okay. And then just 2 on the home health side. One, just with regards to the AME United deal. Can you talk about some areas where you guys are doing some spending in front of that closing and areas where you can kind of get in front of some things. And so this kind of hits the ground running and maybe able to pull some of the synergy capture forward, et cetera, once the deal is actually done and you guys take control of the assets?

It's a great question, David. And I think you saw us call out some of that spend when that was discussing guidance. And that's because we are preparing for the deal even now, investing in the right resources at the service center as well as we've invested significantly in our operational training program. We've hired more CITs this year than we've ever hired before because we knew this potential growth would come in. And so I'd say our primary investments have been to date, from a resource perspective and from a leadership perspective with field leaders, we anticipate additional investments across the service center and additional investments from a shared services standpoint, ensuring that we're able to continue supporting these agencies in the same way that they've been supported by United and Amedisys. But of course, we'll be implementing our locally driven operating model. And so those investments will vary and be a little bit different than maybe what they were under Amedisys and United. And so our focus really to date has been leadership and then certain key resource areas, things like collections and finance. As we get closer, we've got significant investments planned across the service center and the field.

And then I guess just last question, a little bit more of a philosophical one. If the final rule doesn't get candidly a lot more reasonable, can you guys talk a little bit about just how you think about the balance of potential M&A versus just sitting back and gaining market share as your competitors struggle with this dramatically more than you do. Just any high-level comments in terms of how you balance that.

Yes. I mean we talked a little bit about the diversity of our business. And we believe in home health. I mean, any time something like this happens, there's multiple different effects. Obviously, the direct effect is on reimbursement. But on the flip side of that, it's going to create probably a disruption in agencies and their ability to function. And so there's an opportunity from an organic standpoint to really grow in markets if there's a drop-off in number of agencies, but also from a valuation standpoint, there would be a reasonable expectation that there would be opportunities there. But again, we always focus our growth on 3 factors. One, do we have leaders in place ready to step in? Two, do we have strength in operations to be able to support new opportunities? And then third, is it -- does the deal make sense? And so as long as we meet those 3 criteria, whether it's home health, hospice or senior living, we will continue to grow. And frankly, I think it will probably create more momentum or opportunity. We will have to look and see, though, right? Every deal that we do, we value, and we're pretty meticulous in the process and making sure that we can get the return that we're looking for. But I do think that it will create additional opportunity for us in the future. But again, it will be a little tempered early on as we kind of understand what the actual outcome of the final rule is.

And our next question comes from Raj Kumar of Stephens.

Just kind of focusing on senior living, just kind of looking at the overall year-to-date progression from a same-store perspective, kind of being up 10 bps occupancy-wise and then being up high single digits from a RevPOR perspective. Maybe if you could help us kind of bridge what's embedded into this new guidance for senior living from an occupancy and RevPOR perspective? And then maybe also from a margin seasonality perspective as well.

Thanks, Raj. When we're talking the margin side, we do see more flowing through on margin for senior living as we continue to improve our occupancy, right? As we drive that occupancy, it does allow us to drive more through the bottom line. So that is some of the improvement that you're seeing on the EBITDA side. And then when we're talking rates, what's been built into the model is roughly about a 6%, still consistent with where we had reported to earlier, but about a 6% increase. And then on the occupancy front, again, still trending towards that and then -- on the occupancy front, it's about 30 to 50 basis points is what we had at the beginning of the year and still continue to see that we'll be able to drive occupancy, both on the senior living the same store and also as we're bringing these newer operations in driving occupancy there.

Got it. And then just as a follow-up, just like seeing that the Amedisys asset is coming online, does that in the near term, stop progression around the typical turnaround operations that are core to the M&A story? Or -- so essentially, the question is like, is that in the back burner until Amedisys gets integrated or that's still kind of active and going?

So I think, Raj, and clarify if I'm getting this wrong. But as far as integration of previously acquired assets, this doesn't change anything related to our approach to how we integrate, how we support and how we drive improved performance at our recently acquired assets. So whether that's Signature, whether it's GrandCare, whether it's the management agreement that we worked on in Hartford, our focus and energy remains deeply committed to ensuring outstanding results in those locations. That's what our flywheel -- that's central to our flywheel. As far as new acquisitions, I think you'll see a focus for us on these new assets. The pipeline is robust. There's a lot of opportunities right now. We felt like from a geographic location, from a scale and density and a quality of asset, this was the right acquisition for us to pursue. And so our -- much of our time, focus and attention will be on ensuring that these assets transition and become a strength to the overall Pennant platform. And so you may not see the volume kind of the traditional 1 or 2 or 3 a month that we have executed on over the past couple of years. But as far as previously integrated assets, I think our plans remain completely the same with how we're supporting them, how we're driving improvement and ensuring that they deliver outstanding clinical, financial culture and community results.

And Raj, I would just add, just remind you of our model. We have multiple portfolio companies spread out across the country with leaders that are focused on finding additional leaders for the local operations as well as implementing growth strategies. And so in the case of -- as it was with Signature and now as it will be with the Amedisys United operations, we do have some of those portfolio companies that will be supporting those acquisitions and those transitions, but then we will also have other portfolio leaders and portfolio companies that are focused on growth of their own. And so anyway, that's just been our model over time. And of course, most of our focus will be on transitioning because it's such a large number of agencies. But at the same time, as John said, the flywheel continues, and it's why we're structured the way that we are so that we can sort of operate independent of each other in each of those respective portfolio companies.

And our next question comes from Stephen Baxter of Wells Fargo.

Just wanted to ask a couple, I guess, about the guidance since that hasn't really been touched on yet. I guess in terms of the revenue raise, it would be great if maybe we could help understand how much of the revenue raise comes from organic versus acquired revenue. And then I do believe you went into the year expecting same-store growth in both your segments to be approximately 7%. Obviously, you outperformed that in the first half of the year. I was wondering if you could update us on the same-store growth expectations that are now factored in for both home health and hospice and for senior living. And then I have a follow-up.

Thanks for the question, Stephen. I think as we're talking about revenue, there is a piece when we look at what was guidance at the beginning of the year to current time, the update on revenue, we have additional revenue coming in from our GrandCare operation, which was acquired in July that would not be included in kind of that -- what we're looking at is same-store from the beginning of the year. And that would be about $6 million in revenue from GrandCare. And then as we're looking at the revenue growth, still looking at about on the home health front, roughly 7% to 8% revenue growth for home health and hospice front. And then on the senior living front, we're looking at, again, like I said, occupancy growth in that 30 to 50 basis points. and also between 6% to 7%, 8% on the rate RevPOR growth for senior living.

Okay. Got it. If we were to maybe look, I guess, at the EBITDA or maybe more specifically the EBITDA margin, in the first half of the year, looks like those were relatively flat year-over-year, maybe up 10 basis points. And then I think in the back half of the year, they are up a bit more. I think we were doing math suggesting more like 70 basis points year-over-year in the second half. And I think you also have to overcome some of these additional costs on the acquisitions that you're speaking about here. Could you help us just understand what, if anything, should we think about as the key drivers of the year-over-year margin improvement in the back half? I think also maybe the discussion around hospice cap you're lapping some of the bigger exposure you might have had in the back half of this year? Just trying to better understand the progression of margins throughout the year.

Yes. Great question. So there's a handful of levers that we expect to pull in the second half of the year. The first one, it always starts with our operations. We think we can drive and we expect to drive some additional operational levers that will drive improved margin. We kind of addressed some of those points related to the -- in our preparation for a potential home health reimbursement change. But overall, we've got a lot of efforts across each of our business segments to improve there. Secondly, we have factored in a decline in the overall cap amount going into the second half of the year that should have a positive impact relative to the first half of the year. Of course, we factored in the additional hospice final rule, that 2.5 -- roughly 2.5% increase on our Medicare revenue there. And then the other thing I would say is just we've got Signature that continues to optimize. We've got this new acquisition in Grand Care. Each of those should meaningfully contribute in a greater way in the second half of the year. And then we are also seeing momentum in our Senior Living segment. So that, in particular, will drive margin improvement as well.

Thank you. I am showing no further questions at this time. I'd like to turn it back to Brent Guerisoli for closing remarks.

Okay. Well, thank you, Didi, and thank you, everyone, for joining us today.

This concludes today's conference call. Thank you for participating, and you may now disconnect.