Encompass Health Corporation · NYSE:EHC
Encompass Health — HealthSouth — Q4 2016 Earnings Presentation
45 slides from Encompass Health's earnings presentation, Feb 22, 2017
Slide 1: Fourth Quarter 2016 Earnings Call
Fourth Quarter 2016 Earnings Call February 22, 2017 SUPPLEMENTAL INFORMATION
Slide 2: Forward-Looking Statements
Forward-Looking Statements The information contained in this presentation includes certain estimates, projections and other forward-looking information that reflect HealthSouth’s current outlook, views and plans with respect to future events, including legislative and regulatory developments, strate
Slide 3: Table of Contents
Table of Contents Q4 2016 Summary................................................................................................................................................. 4-5 IRF-Home Health Clinical Collaboration ..............................................................................
Slide 4: Q4 2016 Summary
Q4 2016 Summary Q4 Full Year (In Millions) Q4 2016 Q4 2015 % 2016 2015 % HealthSouth Consolidated Net operating revenues $ 949.9 $ 879.3 8.0% $ 3,707.2 $ 3,162.9 17.2% Adjusted EBITDA $ 198.8 $ 191.5 3.8% $ 793.6 $ 682.5 16.3% Inpatient Rehabilitation Segment Net operating revenues $ 767.6 $ 725.9 5
Slide 5: Q4 2016 Summary (cont.)
Q4 2016 Summary (cont.) u Balance Sheet Leverage ratio of 3.8x at year end; funded debt reduced by ~$155 million during full-year 2016 u Sold Pediatric Home Health Assets Non-strategic assets Pre-tax gain of ~$3 million Tax expense of ~$6 million due to limited tax basis in assets sold Rep
Slide 6: IRF-Home Health Clinical Collaboration (All Payors)
IRF-Home Health Clinical Collaboration (All Payors) Overlap Markets Clinical collaboration rate with HealthSouth IRFs increased by 730 basis points over Q4 2015 28.2% u Overlap markets are defined as a 20.9% Collaboration Rate Collaboration Rate HealthSouth IRF located within a 30- mile radius of an
Slide 7: Inpatient Rehabilitation Segment - Revenue
Inpatient Rehabilitation Segment - Revenue Q4 Q4 Favorable/ ($millions) 2016 2015 (Unfavorable) Net operating revenues: Inpatient $ 740.9 $ 696.8 6.3% Outpatient and other 26.7 29.1 (8.2%) Total segment revenue $ 767.6 $ 725.9 5.7% (Actual Amounts) Discharges 41,474 40,891 1.4% Same-store discharge
Slide 8: Inpatient Rehabilitation Segment - Adjusted EBITDA
Inpatient Rehabilitation Segment - Adjusted EBITDA Q4 % of Q4 % of Segment Adjusted ($millions) 2016 Revenue 2015 Revenue EBITDA for the quarter Net operating revenues $ 767.6 $ 725.9 of $197.6 million Less: Provision for doubtful accounts (13.2) 1.7% (13.3) 1.8% Net operating revenues less - Salari
Slide 9: Home Health and Hospice Segment - Revenue
Home Health and Hospice Segment - Revenue Q4 Q4 Favorable/ ($millions) 2016 2015 (Unfavorable) Net operating revenues: Home health revenue $ 165.2 $ 144.4 14.4% Hospice revenue 17.1 9.0 90.0% Total segment revenue $ 182.3 $ 153.4 18.8% (Actual Amounts) Admissions 27,957 22,892 22.1% Same-store admis
Slide 10: Home Health and Hospice Segment - Adjusted EBITDA
Home Health and Hospice Segment - Adjusted EBITDA Q4 Q4 % of % of ($millions) 2016 Revenue 2015 Revenue Net operating revenues $ 182.3 $ 153.4 Segment Adjusted Less: Provision for doubtful accounts (1.3) 0.7% (0.7) 0.5% EBITDA for the Net operating revenues less provision for doubtful accounts 181.0
Slide 11: Earnings per Share - As Reported
Earnings per Share - As Reported Q4 Year Ended u EPS for Q4 2016 were impacted by: (In Millions, Except Per Share Data) 2016 2015 2016 2015 Lower interest expense due to the redemptions Inpatient rehabilitation segment Adjusted EBITDA $ 197.6 $ 189.9 $ 797.2 $ 691.0 of the 7.75% Senior Notes due 2
Slide 12: Adjusted Earnings per Share
Adjusted Earnings per Share(5) Q4 Full Year 2016 2015 2016 2015 Earnings per share, as reported $ 0.68 $ 0.48 $ 2.59 $ 1.92 Adjustments, net of tax: Government, class action, and related settlements — — — 0.04 Professional fees — accounting, tax, and legal — — 0.01 0.02 Mark-to-market adjustment for
Slide 13: 2016 Adjusted Free Cash Flow
2016 Adjusted Free Cash Flow(6) $33.0 $111.1 $3.1 ($29.8) ($22.4) ($21.1) $462.9 $389.0 Adjusted Free Cash Adjusted Working Capital Cash Interest Cash Tax Maintenance Preferred Adjusted Free Cash Flow FY 2015 EBITDA and Other Expense Payments, Capital Expenditures Dividends Flow FY 2016 Net of Refun
Slide 14: Guidance
Guidance 2016 2017 Actuals Guidance Net Operating Revenues Net Operating Revenues $3,707.2 million $3,850 million to $3,950 million Adjusted EBITDA(7) Adjusted EBITDA(7) $793.6 million $800 million to $820 million Adjusted Earnings per Share Adjusted Earnings per Share from Continuing Operations fro
Slide 15: Guidance Considerations
Guidance Considerations Inpatient Rehabilitation Home Health and Hospice u Estimated 1.9% increase in Medicare u Estimated 3.6%, or ~$21 million, net pricing for Q1 through Q3; ~1.0% for Q4 Medicare pricing reduction for CY 2017 (see page 23) (see page 23) u Salary increase of ~3.0% (see page 24) u
Slide 16: Adjusted Free Cash Flow and Tax Assumptions
Adjusted Free Cash Flow(6) and Tax Assumptions Certain Cash Flow Items 2015 2016 2017 (millions) Actuals Actuals Assumptions • Cash interest expense $128.6 $158.4 $150 to $160 (net of amortization of debt discounts and fees) • Cash payments for taxes, net of u Increased cash payments for $9.4 $31.9
Slide 17: Free Cash Flow Priorities
Free Cash Flow Priorities (In Millions) 2015 2016 2017 Highest Priority Actuals Actuals Assumptions IRF bed expansions $20.8 $19.1 $30 to $40 Growth New IRF’s in Core - De novos 47.8 72.6 85 to 105 Business - Acquisitions 786.2 — TBD - Replacement hospitals — 11.1 10 to 20 New home health and hospic
Slide 18: Appendix
Appendix HEALTHSOUTH.
Slide 19: HealthSouth: A Leading Provider of Post-Acute Care
HealthSouth: A Leading Provider of Post-Acute Care 59% of HealthSouth's IRFs are located within a 30-mile radius of an Encompass location. Encompass Inpatient Rehabilitation Home Health and Hospice Portfolio - As of December 31, 2016 Portfolio – As of December 31, 2016 IRF Market Share Inpatient Reh
Slide 20: Pre-Payment Claims Denials - Inpatient Rehabilitation Segment
Pre-Payment Claims Denials - Inpatient Rehabilitation Segment HealthSouth reserves for pre-payment claim denials via the provision for Background doubtful accounts upon notice from a MAC that a claim is under review. For several years, under programs designated as “widespread Impact to Income Stat
Slide 21: Expansion Activity
Expansion Activity 10 IRF Development Projects Underway 2 New States Inpatient Rehabilitation Facilities Q4 2016 expansion activity highlights: # of New Beds u Opened new 50-bed hospital in Modesto, CA in October 2016 2016 2017 2018 u Received CON approval to build a 68-bed hospital in Winston- Sale
Slide 22: Business Outlook 2017 to 2019
Business Outlook 2017 to 2019* Business Model • Adjusted EBITDA CAGR: 5% - 9%** • Strong free cash flow generation 2017 2018 2019 • Quarterly cash dividends Shareholder • Opportunistic repurchases Distributions - (~$96 million authorization remaining as of December 31, 2016) Strategy Component • Tar
Slide 23: Business Outlook 2017 to 2019: Revenue Assumptions
Business Outlook 2017 to 2019: Revenue Assumptions Inpatient Rehabilitation Home Health & Hospice Volume (Includes New Stores) • 3+% annual discharge growth • 10+% annual episode growth • 10% to15% annual episode growth Approx. 73% of Revenue • Includes $35-$40 Approx. 83% ofmillion Revenueper Medic
Slide 24: Business Outlook 2017 to 2019: Labor and Other Expense Assumptions
Business Outlook 2017 to 2019: Labor and Other Expense Assumptions Inpatient Rehabilitation Home Health and Hospice Salaries and Benefits 2017 2018 2019 Salary increases 2.75-3.25% 2.75-3.25% 2.75-3.25% Benefit costs increases 5-10% 5-10% 5-10% Salaries Percent of Salaries & Benefits Salaries & Bene
Slide 25: Debt Schedule
Debt Schedule Change in Dec. 31, Dec. 31, Debt vs. ($millions) 2016 2015 YE 2015 Advances under $600 million revolving credit facility, July 2020 - LIBOR +200bps $ 152.0 $ 130.0 $ 22.0 Term loan facility, July 2020 - LIBOR +200bps 421.2 443.3 (22.1) Bonds Payable: 7.75% Senior Notes due 2022 — 174.3
Slide 26: Debt Maturity Profile - Face Value
Debt Maturity Profile - Face Value HealthSouth is positioned with a cost-efficient, flexible capital structure. As of December 31, 2016* ($ in millions) Callable beginning November 2017 Callable beginning $1,200 September 2020 $415 Senior Available Callable beginning March 2018 Notes Holders have a
Slide 27: New-Store/Same-Store IRF Growth
New-Store/Same-Store IRF Growth 25.0 Hot Springs, AR (40 beds) Reliant (857 beds) Bryan, TX (49 beds) Franklin, TN (40 beds) Broken Arrow, OK (22 beds) 20.0 Altamonte Springs, FL (50 beds) 15.0 Johnson City, TN (26 beds) Newnan, GA (50 beds) Lexington, KY (158 beds) Middletown, DE (34 beds) Savannah
Slide 28: Payment Sources (Percent of Revenues)
Payment Sources (Percent of Revenues) Inpatient Home Health Rehabilitation and Hospice Consolidated Segment Segment Q4 Q4 Q4 Full Year 2016 2015 2016 2015 2016 2015 2016 2015 Medicare 73.3% 73.6% 84.3% 82.6% 75.3% 75.2% 75.2% 74.9% Medicare Advantage 7.8% 7.8% 8.7% 9.2% 8.0% 8.0% 7.9% 7.9% Managed c
Slide 29: Inpatient Rehabilitation Operational and Labor Metrics
Inpatient Rehabilitation Operational and Labor Metrics Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2016 2016 2016 2016 2015 2015 2015 2015 2016 2015 (In Millions) Net patient revenue- inpatient $ 740.9 $ 724.1 $ 721.2 $ 719.4 $ 696.8 $ 625.1 $ 618.7 $ 606.6 $ 2,905.5 $ 2,547.2 Net patient revenue- outpatient
Slide 30: Home Health and Hospice Operational Metrics
Home Health and Hospice Operational Metrics Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2016 2016 2016 2016 2015 2015 2015 2015 2016 2015 (In Millions) Net home health revenue $ 165.2 $ 162.0 $ 157.1 $ 150.9 $ 144.4 $ 118.3 $ 111.5 $ 103.9 $ 635.2 $ 478.1 Net hospice and other revenue 17.1 13.1 11.0 9.7 9.0 8
Slide 31: Common Stock Warrants
Common Stock Warrants On September 30, 2009, HealthSouth issued 8,151,265 warrants in satisfaction of its obligation under the comprehensive settlement of the 2003 consolidated class action suit brought by the Company’s stockholders and bondholders. Under the terms of the agreement, the warrants wer
Slide 32: Share Information
Share Information Weighted Average for the Period Q4 Full Year (Millions) 2016 2015 2016 2015 2014 Basic shares outstanding(8) 88.6 90.1 89.1 89.4 86.8 Convertible perpetual preferred stock(8) — — — 1.0 3.2 Convertible senior subordinated notes(20) 8.6 8.4 8.5 8.3 8.2 Restricted stock awards, diluti
Slide 33: Segment Operating Results
Segment Operating Results Q4 2016 Q4 2015 Home HealthSouth Home HealthSouth Health and Reclasses Consolidated Health and Reclasses Consolidated IRF Hospice IRF Hospice Net operating revenues $ 767.6 $ 182.3 $ — $ 949.9 $ 725.9 $ 153.4 $ — $ 879.3 Less: Provision for doubtful accounts (13.2) (1.3) —
Slide 34: Segment Operating Results
Segment Operating Results Year Ended December 31, 2016 Year Ended December 31, 2015 Home HealthSouth Home HealthSouth Health and Reclasses Consolidated Health and Reclasses Consolidated IRF Hospice IRF Hospice Net operating revenues $ 3,021.1 $ 686.1 $ — $ 3,707.2 $ 2,653.1 $ 509.8 $ — $ 3,162.9 Les
Slide 35: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA(7) 2016 Q1 Q2 Q3 Q4 Full Year Per Per Per Per Per (in millions, except per share data) Total Share Total Share Total Share Total Share Total Share Net Income $ 76.7 $ 81.2 $ 78.1 $ 82.1 $ 318.1 Loss (income) from disc ops, net of tax, attributable to H
Slide 36: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA(7) 2015 Q1 Q2 Q3 Q4 Full Year Per Per Per Per Per (in millions, except per share data) Total Share Total Share Total Share Total Share Total Share Net Income $ 59.0 $ 60.2 $ 67.8 $ 65.8 $ 252.8 Loss (income) from disc ops, net of tax, attributable to H
Slide 37: Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA
Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q4 Full Year (Millions) 2016 2015 2016 2015 Net cash provided by operating activities $ 116.0 $ 116.6 $ 605.5 $ 484.8 Provision for doubtful accounts (14.5) (14.0) (61.2) (47.2) Professional fees—accounting, tax, and legal — 0.3
Slide 38: Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations Before Income Tax Expense
Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations Before Income Tax Expense Three Months Ended Year Ended December 31, December 31, 2016 2015 2016 2015 In Millions Total segment Adjusted EBITDA $ 225.6 $ 216.4 $ 899.6 $ 774.1 General and administrative expenses (36.8) (3
Slide 39: Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow
Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow(6) Q4 Full Year ($millions) 2016 2015 2016 2015 2014 Net cash provided by operating activities $ 116.0 $ 116.6 $ 605.5 $ 484.8 $ 444.9 Impact of discontinued operations 0.1 (0.1) 0.7 0.7 1.2 Net cash provided by o
Slide 40: Adjusted EPS - Q4 2016
Adjusted EPS(5) - Q4 2016 For the Three Months Ended December 31, 2016 Adjustments Mark-to- Market Sale of Adjustment Pediatric Income Tax for Stock Home Health Valuation As Appreciation Assets and and Other As Reported Rights Hospital Adjustments Adjusted (In Millions, Except Per Share Amounts) Adj
Slide 41: Adjusted EPS - Q4 2015
Adjusted EPS(5) - Q4 2015 For the Three Months Ended December 31, 2015 Adjustments Pro. Income Gov’t, Class Fees - Tax Loss on Action, & Acct., Valuation Early As Related Tax, & & Other Transaction Exting. As Reported Settlements Legal Adj. Costs of Debt Adjusted (In Millions, Except Per Share Amoun
Slide 42: Adjusted EPS - YTD 2016
Adjusted EPS(5) - YTD 2016 For the Year Ended December 31, 2016 Adjustments Mark-to- Pro. Market Loss Sale of Fees - Adjustment on Pediatric Income Tax Acct., for Stock Early Home Health Valuation As Tax, & Appreciation Exting. Assets and and Other As Reported Legal Rights of Debt Hospital Adjustmen
Slide 43: Adjusted EPS - YTD 2015
Adjusted EPS(5) - YTD 2015 For the Year Ended December 31, 2015 Mark-to- Gov’t, Pro. Income Market Loss Class Fees - Tax Adjustment on Action, & Acct., Valuation for Stock Early As Related Tax, & & Other Appreciation Transaction Exting. As Reported Settlements Legal Adj. Rights Costs of Debt Adjuste
Slide 44: End Notes
End Notes (1) Current income tax expense was $17.4 million and $4.4 million for Q4 2016 and Q4 2015, respectively. Current income tax expense was $31.0 million and $14.8 million for the year ended December 31, 2016 and 2015, respectively. (2) The interest and amortization related to the convertible
Slide 45: End Notes, con't.
End Notes, con’t. (12) The Company estimates the expected impact of each rule utilizing, among other things, the acuity of its patients over the 8-month (home health segment) to 12- month (inpatient rehabilitation segment) period prior to each rule’s release and incorporates other adjustments includ