Title

Presentation

Operator: 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.

Mark Brewer: 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.

Barb Jacobsmeyer: 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 plants 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’s 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 in 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 and 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 work 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 open 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.

Crissy Carlisle: 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 cost and increased cost 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 claim. 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 cost 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 cost 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 cost 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 and improving our clinical capacity in both segments, we are having to pay more for these clinicians and use contract labors 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 cost 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 cost 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 a negotiating more and improved Medicare Advantage contracts is a 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.

Barb Jacobsmeyer: 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.

See also Ray Dalio Stock Portfolio: Top 15 Stock Picks and 10 Most Profitable Bank Stocks to Invest In.

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

Brian Tanquilut: 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.

Crissy Carlisle: 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.

Brian Tanquilut: Got it. Okay. And then, as I look at page 14 of your slide deck, there’s a charge there for roughly $2.5 million for strategic review costs. And then, I guess, you called out the cost of roughly $9 million. So, first, what is that $2.5 million? And then, on the costs, is that kind of where it should be — the $9 million incremental should we expect more going forward, or is that the right number to run rate the business?

Crissy Carlisle: 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.

Brian Tanquilut: Got it. Awesome. Thank you.

Crissy Carlisle: Sure.

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

Tao Qiu Key: Hey, good morning.

Barb Jacobsmeyer: Good morning.

Tao Qiu Key: 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?

Barb Jacobsmeyer: So, there’s a difference, first, I guess. So, there is two things. Contract labor is different from PRN. So, contract labor is the agency labor that you pay, that is a pretty significant amount above our normal staffing rate. So, for example, in quarter four, 5.2% our visits in Hospice was performed by contract labor nurses compared to 1.7% last year. That is different than PRN. So, PRN are our staff. They’re hired by us. They’re just — they’re paid as our staff members. However, their status is that they work when they want and they don’t work when they don’t want to. And so, it’s a very flexible staffing. So, when we talk about the shift of full-time to PRN, it really is addressing those nursing staff that want more flexibility.

So, when you see us going from that 34% to 39%, what it means is you would have expected our vacancy rate to actually go down with how positive our quarter four net new hires were. However, it stayed relatively stable because what we wanted to do is readjust the headcount needed to kind of counter that movement of some of the staff to PRN and that’s why you see that 24% vacancy rate.

Tao Qiu Key: Yeah. Got it. You need more staff to handle the same volume.

Barb Jacobsmeyer: Yeah.

Tao Qiu Key: Just curious on the — could you talk about the nine new contracts executed this quarter and the additional nine in the works? What is the size of the potential beneficiary pool that you could access and how quickly do you think you can build scale there? And maybe refresh us on the pricing you expect from those?

Barb Jacobsmeyer: Sure. So, what I would say is what we’ve decided is probably best to give you those covered lives in the ones that are effective. Last quarter, we talked about the ones we had negotiated. We decided that probably what’s most meaningful is what is the member lives of those that are now effective. And so, when you look at the ones that are effective, which are nine of the 18 that we negotiated between quarter three and quarter four, of those nine, it covers a little over 1 million lives, seven of those are at episodic rates. And the reason we’ll do the covered lives on those that are effective as we are finding that there’s a pretty big variance of — by the — when you start and negotiate the terms to it actually being effective and it has a lot to do with the credentialing that has to happen on the payer side. So that can range between three and six months to actually have those contracts become effective in a market.

Tao Qiu Key: That’s helpful. Thank you.

Operator: The next question is from A.J. Rice with Credit Suisse. Your line is open.

Barb Jacobsmeyer: Good morning.

A.J. Rice: Hi. I understand, obviously, the growth rate in your MA book is quite robust and the challenges associated with that. On the fee-for-service side, that seems to be declining at high single digits. I know there’s not a lot of growth in fee-for-service enrollment, but I’m sort of still surprised and that’s happening for a couple of quarters now. Do you have any assessment as to why the fee-for-service visits have — or episodes have dropped off to the way they have? It seems like it’s greater decline than what we’re seeing in the actual enrollment in fee-for-service.

Barb Jacobsmeyer: Yeah. I think a couple of — it’s a lot of different factors, but I would say the ones I would call out is we have seen, obviously, that shift in the markets in which we operate. So, when we look at the MA enrollees in our markets, the MA enrollees have gone up 11%, while the fee-for-service in our markets have gone down 4.1%. I would also say that one — the other thing we have felt that we’ve always had a strong program called our community care program, which is providing these services at assisted living senior apartment settings. What we have found is that you have a really strong MA business development person that comes in, provides launch for the entire apartment complex or senior setting and the next thing you know in a relatively short period of time that entire book of business that was historically fee-for-service has shifted to an MA plan.

So, we have seen that in many of our markets. And it’s why one of the things we want to do right now, and we’re working with our business development team in the field is identify for us those large referral sources that not only have MA plans, but they have a strong book of fee-for-service, so that we can prioritize those type of regional agreements to be a better resource to those referral sources to try to grow additional fee-for-service alongside the MA book. So, it’s really getting the feedback from our field representatives to our payer innovation team on what plans and where should we prioritize for these regional contracts.

A.J. Rice: Okay. And then, maybe just my follow-up, trying to flesh out if you have any more metrics you’d share around the labor — use of contract labor percentage in Q4 versus what you’re thinking for 2023, any update on turnover rate? And are you turning away any volume because you can’t get to labor? Was that a headwind in any way to your admissions in the Home Health or Hospice side?

Barb Jacobsmeyer: So, we do continue to have some staffing limitations in branches. So, for example, in quarter four, we had 62 branches that were staffing constrained for Home Health. For Hospice, it was seven branches. So, there are some markets where we continue to have some staffing constraints. Those are the markets where — and I think we mentioned that while we tried — we anticipate having a more normal merit increase in 2023. There are some markets where we may have to do some market adjustments. And these are examples if we continue to have the headwinds of not being able to fill all those positions. I would say we have seen the contract labor already go down. Hospice has been the primary user of contract labor in quarter four.

We’ve already seen that decrease in — by the end of January. And again, are only using those in the markets where we know we’ve done the staffing. We’ve hired people there in orientation. We won’t approve the use of contract labor for day-in and day-out use if we haven’t done the hiring because frankly it’s just too expensive of a resource for a clinician that does individual visits.

A.J. Rice: Okay. Thanks a lot.

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

Barb Jacobsmeyer: Good morning.

Jason Cassorla: 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?

Barb Jacobsmeyer: 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.

Jason Cassorla: 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?

Barb Jacobsmeyer: Yeah. So, I do think — if you think about it, we hired our executive in June of last year. She’s really spent our time kind of understanding what was going on in our markets. The rollout of the new case management model happened in fourth quarter. That didn’t mean overnight, it turned on, it meant that everyone had — each local branch had to do kind of a gap assessment on do I need to hire to be able to really function in this case management model. But we’re excited to see the positive trend in hiring in that fourth quarter, and it has the word getting out that we’re moving to this case management model. We’ve been excited to see in January that our candidate pool has continued to be strong. So, it is really about getting the staffing where we need to, so to your point, we can get back to historic growth.

Jason Cassorla: Okay. Thank you for the color.

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

Andrew Mok: 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.

Crissy Carlisle: Yeah. So, Andrew, we don’t give that level of detail in our guidance considerations. It’s — again, it’s a balance between the growth that we see in our markets and the shift to more Medicare Advantage in addition to our strategy to also use those Medicare Advantage contracts as a way to get more traditional Medicare fee-for-service back from our referral sources. So, we just — we don’t go into that level of detail because if I tell you one factor, and it comes in slightly different, but we still make guidance, we usually get deemed on that. So, we’re not going to go into that level of detail.

Andrew Mok: 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.

Barb Jacobsmeyer: Yeah. So, I would think that 2023 is probably going to be in that $26 million to $27 million range. Again, it’s going to be — it’s got the TSA in there, the TSA is going to rolloff as — in response to Brian’s question, so by the time we get to the back half of the year, you should be at somewhere in that more normalized run rate of the ultimate $26 million to $28 million, but I think given some of those ramp ups in 2023, you’re probably talking about a $26 million to $27 million range.

Andrew Mok: Got it. Thank you.

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

Joanna Gajuk: Hi. Thank you. So, just a couple of follow-ups. So, you mentioned that you do not, I guess, provide for deal spending. So, am I reading correctly you kind of saying you don’t assume acquisition — incremental acquisition in your 2023 guidance, correct?

Barb Jacobsmeyer: That’s correct. So, the opening of de novos, Joanna, is included in that guidance. And then the — of course, obviously, the acquisitions that we did in the fourth quarter of 2022 — remember that we completed $36 million of acquisitions in that quarter, they are in the number, but there’s nothing specific to acquisitions within the 2023 guidance at this time.

Joanna Gajuk: Okay. And the other follow-up. So, there was a question on visits per episode, I guess, it’s declined to 14% in this quarter. And it sounds like you maybe are thinking that could go even lower because I guess you’re rolling out post to additional markets. So, is that the way to think about it like some 14% lower or are you talking about more how things kind of came in on average for the year? Kind of just asking, is this a sustainable number — the 14.3% per episode and I guess how low can you go really before you start impact quality?

Barb Jacobsmeyer: Right. I mean, what I would say is we don’t have a target and mainly because of that balance between the readmission rates and the visits per episode. What I would say is that as we certainly look — a lot of it has to do with the mix of the patients. So, as we grow, again, more of the therapy intensive or rehab intensive type of admissions, those do come usually at higher visits per episode. So, it’s kind of a balance. As we rollout Pulse, that’s obviously the focus is to be able to have more real-time. So, if there’s an ability to lower the visits than what Medalogix initially recommended that Pulse tool is more real-time, so versus the place that still has the care tool out there, they get a onetime snapshot of recommendation.

Pulse keeps it updated and can show that maybe someone needs to go up in visits or maybe they’ve improved and they can go down and visits. So, again, it’s — we don’t really have a target for the field. It’s balancing the appropriate number of visits to manage the high quality.

Joanna Gajuk: If I may just another follow-up on the standalone company cards 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.

Crissy Carlisle: Yeah. So, Joanna, for full year 2022, if I include — remember the first two quarters of the year had the overhead allocation from Encompass Health and in the last two quarters were the standalone costs for the company. Let’s say, for the full year is around $17 million. Those last two quarters, we’re running at about $5 million, which, yeah, is a little bit better than we had first anticipated. Part of that has to do with just the ramp up of staff, which again we think we’re doing a great job in trying to be very cautious as we examine every hire and determine is the timing right and is that the initial plan from the strategic review and the plan to do standalone and ramp up. How are we doing that? How are we assessing that?

Is that still the right path? Asking all those questions. At this time, I still believe that $26 million to $28 million ultimately is the right number. It’s just that it’s — we have ramped up a little bit slower than originally determined.

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

Barb Jacobsmeyer: Good morning.

Larry Solow: Thanks. Good morning, Crissy and Barb. Thank you for taking the question. Just a couple just to clarify. On the guidance range, relatively wide — especially for the EPS range. I know you mentioned, I guess, the biggest factor is the mix shift and the transition to non-episodic. How — is that — can you just sort of — is that like the $40 million headwind, I guess, that you say from that mix is that sort of the mid-point of guidance and that number is the biggest variable that kind of can swing guidance to a lower or higher end or other things — and other big factors in there?

Crissy Carlisle: 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.

Larry Solow: And that $14 million number that you kind of threw out there as a headwind for that, is that — would that number, that $14 million kind of represent the mid-point of your range or if it’s a higher headwind, you are at the lower point — you go lower, if it’s a less headwind you go higher? Is that fair way to look at?

Crissy Carlisle: 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.

Larry Solow: Okay. And can you just clarify the $5 million from the audit from a couple of years back, was that — did that all flow to the bottom line, is that $5 million in that EBITDA number?

Crissy Carlisle: It is.

Larry Solow: Okay. And just like — if I could just squeeze one more question just on acquisitions. It sounds like this year, you don’t want to necessarily put a line in the sand and have — well, fall short of that or ahead of that in terms of acquisitions. But with your leverage at 3.5 times, is it fair to say that this could be a quiet year or maybe you kind of want to wait till you get leverage down a little bit? How do you kind of view that? Thank you.

Barb Jacobsmeyer: So, we view it as — we believe we can still achieve our business and operational objectives with the leverage that we currently have and what’s projected in the guidance range that we’ve given. We do want to acknowledge the fact that leverage is increasing and that we’re going to have periods of — for example, in the first quarter of this year, we’re going to roll-off the highest quarter of 2022. And as I’ve already said, 2023 is going to — financial performance should be better in the back half than in the first half. So, those are just facts that we are keenly aware of and managing through. I don’t want to say that acquisitions are off the table. I just want to say that we’re going to be very disciplined.

And when they make strategic sense, and we believe it’s a nicely valued opportunity, we will pursue it. But again, we’re going to be very disciplined in that approach because again we acknowledge the leverage, and we want to present a balanced message.

Larry Solow: Got it. Appreciate all the color. Thank you so much.

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

Jason Cassorla: 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.

Barb Jacobsmeyer: 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 operation 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.

Jason Cassorla: Okay. Thank you.

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

End of Q&A:

Mark Brewer: 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.

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