Encompass Health Corporation · NYSE:EHC
Encompass Health — Q4 2018 Earnings Presentation
50 slides from Encompass Health's earnings presentation, Feb 8, 2019
Slide 1: Fourth Quarter 2018 Earnings Call
Fourth Quarter 2018 Earnings Call Feb. 8, 2019 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 Encompass Health’s current outlook, views and plans with respect to future events, including legislative and regulatory developments, s
Slide 3: Table of contents
Table of contents Q4 2018 Summary ................................................................................................... 4-5 Rebranding and name change ..................................................................................... 6 Clinical collaboration rate ...................
Slide 4: Q4 2018 summary
Q4 2018 summary Q4 Full Year ($millions) Q4 2018 Q4 2017 Growth 2018 2017 Growth Encompass Health Consolidated Net operating revenues* $ 1,096.0 $ 1,008.8 8.6% $ 4,277.3 $ 3,913.9 9.3% Adjusted EBITDA $ 221.8 $ 208.2 6.5% $ 901.0 $ 823.1 9.5% Inpatient Rehabilitation Segment Net operating revenues*
Slide 5: Q4 2018 summary (cont.)
Q4 2018 summary (cont.) u Expansion activity (see page 24) Began operating a new 68-bed inpatient rehabilitation hospital in Winston-Salem, North Carolina, a joint venture with Novant Health, Inc. Added four home health locations in Alabama, Massachusetts and South Carolina and two hospice locat
Slide 6: Rebranding and name change
Rebranding and name change The Company’s rebranding and name change reinforce its existing strategy and position as an integrated provider of inpatient and home-based care. JULY 2017 APRIL 2018 OCT. 2018 Announced Phase 1 field asset Phase 3 field asset planned conversions conversions name change JA
Slide 7: The Company continues to improve the patient experience through integrated care delivery
The Company continues to improve the patient experience through integrated care delivery. Inpatient rehabilitation–home health clinical collaboration (all payors) overlap markets* 31.7% 34.9% Collaboration rate Collaboration rate u As of Dec. 31, 2018, Encompass Health had 81 overlap markets.* u The
Slide 8: Inpatient rehabilitation segment - revenue
Inpatient rehabilitation segment - revenue Q4 Q4 Favorable/ ($millions) 2018 2017 (Unfavorable) Net operating revenues:* Inpatient $ 822.8 $ 776.9 5.9% Outpatient and other 22.9 25.5 (10.2%) Total segment revenue $ 845.7 $ 802.4 5.4% (Actual Amounts) Discharges 45,498 43,910 3.6% Same-store discharg
Slide 9: Inpatient rehabilitation segment - Adjusted EBITDA
Inpatient rehabilitation segment - Adjusted EBITDA Q4 Q4 % of % of ($millions) 2018 Revenue 2017 Revenue Net operating revenues* $ 845.7 $ 802.4 u Segment Adjusted EBITDA for Operating expenses: the quarter of $211.7 Salaries and benefits (437.2) 51.7% (408.1) 50.9% million. • Salaries and benefits
Slide 10: Home health and hospice segment - revenue
Home health and hospice segment - revenue Q4 Q4 Favorable/ ($millions) 2018 2017 (Unfavorable) Net operating revenues:* Home health revenue $ 215.3 $ 186.3 15.6 % Hospice revenue 35.0 20.1 74.1 % Total segment revenue $ 250.3 $ 206.4 21.3 % Home Health Metrics (Actual Amounts) Admissions 35,151 31,7
Slide 11: Home health and hospice segment - Adjusted EBITDA
Home health and hospice segment - Adjusted EBITDA u Segment Adjusted EBITDA for the quarter increased Q4 Q4 28.2% to $44.1 million. % of % of ($millions) 2018 Revenue 2017 Revenue Included the acquisition of Net operating revenues* $ 250.3 $ 206.4 Camellia Healthcare on May 1, 2018 All expense r
Slide 12: Consolidated Adjusted EBITDA
Consolidated Adjusted EBITDA Consolidated Adjusted EBITDA for the quarter of $221.8 million u General and administrative expenses decreased as a percent of consolidated revenue primarily due to operating leverage resulting from revenue growth. % of Consolidated % of Consolidated ($millions) Q4 2018
Slide 13: Earnings per share - as reported
Earnings per share - as reported Q4 Year Ended (In Millions, Except Per Share Data) 2018 2017 2018 2017 Consolidated Adjusted EBITDA $ 221.8 $ 208.2 $ 901.0 $ 823.1 u EPS decreased in Q4 2018 compared to Q4 2017 due to the accrual of loss Depreciation and amortization (52.9) (46.6) (199.7) (183.8) c
Slide 14: Adjusted earnings per share
Adjusted earnings per share(4) Q4 Year Ended 2018 2017 2018 2017 Earnings per share, as reported $ 0.26 $ 0.61 $ 2.92 $ 2.69 Adjustments, net of tax: Government, class action, and related settlements 0.52 — 0.52 — Mark-to-market adjustment for stock appreciation rights (see page 20) 0.03 — 0.21 0.08
Slide 15: 2018 Adjusted free cash flow
2018 Adjusted free cash flow(6) $77.9 $24.0 $2.4 ($20.3) ($14.6) $538.1 $468.7 Adjusted free cash Adjusted Working capital Cash interest Cash tax Maintenance Adjusted free cash flow FY 2017 EBITDA and other payments payments, capital expenditures flow FY 2018 net of refunds u Adjusted free cash flow
Slide 16: Guidance
Guidance 2018 2019 Actuals Guidance Net operating revenues* Net operating revenues $4,277.3 million $4,500 million to $4,600 million Adjusted EBITDA(7) Adjusted EBITDA(7) $901 million $925 million to $945 million Adjusted earnings per share Adjusted earnings per share from continuing operations from
Slide 17: 2019 Guidance considerations
2019 Guidance considerations Inpatient rehabilitation Home health and hospice u Estimated 1.2% increase in Medicare pricing u Estimated 1.5% net Medicare pricing for Q1 through Q3 and estimated 2.4% increase for CY 2019 (see page 27) increase for Q4 (see page 27) u Salary increase of approx. 3.0%; b
Slide 18: Adjusted free cash flow assumptions
Adjusted free cash flow(6) assumptions Certain cash flow items 2018 2019 (millions) Actuals Assumptions Cash interest payments (net of amortization of debt discounts $143.3 $145 to $155 u Revised from an initial 2019 and fees) estimate of $140 to $150 million due to the favorable impact of bonus dep
Slide 19: Uses of free cash flow
Uses of free cash flow 2018 2019 Actuals Assumptions IRF bed expansions $22.3 $40 to $50 New IRFs - De novos 76.4 85 to 115 Growth in - Acquisitions — opportunistic core - Replacement IRFs and other 24.5 90 to 110 business Home health and hospice acquisitions (includes Camellia in 2018)* 143.9 50 to
Slide 20: Overview of rollover shares and SARs held by home health and hospice management
Overview of rollover shares and SARs held by members of the home health and hospice management team Background In connection with the 2014 acquisition of Encompass Home Health and Hospice: • Certain members of that management team rolled a portion of their pre-acquisition equity into the post-acquis
Slide 21: Appendix
Appendix
Slide 22: Encompass Health: a leading provider of inpatient rehabilitation and home-based care
Encompass Health aand leading provider of inpatient rehabilitation home-based care Market overlap 81 of EHC’s IRFs have an EHC home health location within the service area.* Portfolio as of Dec. 31, 2018 Inpatient rehabilitation hospitals (“IRFs”) Home health locations Hospice locations 6 Future IRF
Slide 23: Pre-payment claims denials - inpatient rehabilitation segment
Pre-payment claims denials - inpatient rehabilitation segment Background Encompass Health reserves pre-payment claim denials as a reduction of • For several years, under programs designated as “widespread probes,” net operating revenues upon notice from a MAC a claim is under review. certain Medicar
Slide 24: Expansion activity
Expansion activity Inpatient Rehabilitation Facilities Previously announced 6 IRF development 4 New states # of New Beds projects underway 2018 2019 2020 De novo: Shelby County, AL 34 — — Bluffton, SC 38 — — 1 Murrieta, CA — 50 — 2 Katy, TX — 40 SiouxFalls, 3 Sioux Falls,SDSD — — 40 Coralville,IAIA
Slide 25: Impact of the new revenue recognition accounting standard
Impact of the new revenue recognition accounting standard u During the first quarter of 2018, Encompass Health adopted a new accounting standard (ASC 606 - Revenue from Contracts with Customers) which clarifies the standard for recognizing revenue. u The primary impact to the Company’s financial rep
Slide 26: Business outlook: 2019 to 2021
Business outlook: 2019 to 2021 2019 2020 2021 • Enhance clinical collaboration between the Company’s IRFs and home health locations Key • Build stroke market share operational • Develop and implement post-acute solutions initiatives • Implement changes to reimbursement models in both business segmen
Slide 27: Business outlook 2019 to 2021: revenue assumptions
Business outlook 2019 to 2021: revenue assumptions Volume Inpatient Rehabilitation* Home Health* (includes new stores) 3+% annual discharge growth 10+% annual admission growth Approx. 73% of segment revenue Approx. 85% of segment revenue Medicare Pricing FY 2019 FY 2020 FY 2021 CY 2019 CY 2021 CY 20
Slide 28: Business outlook 2019 to 2021: labor and other expense assumptions
Business outlook 2019 to 2021: labor and other expense assumptions Inpatient Rehabilitation Home Health and Hospice Salaries and Benefits 2019 2020 2021 Salary increases 2.75-3.25% 2.75-3.25% 2.85-3.35% Benefit costs increases 6-8% 5-10% 5-10% % of Salaries and Benefits Salaries Salaries Salaries ~9
Slide 29: Debt schedule
Debt schedule Change in December 31, December 31, Debt vs. ($millions) 2018 2017 YE 2017 Advances under $700 million revolving credit facility, September 2022 - LIBOR +150bps $ 30.0 $ 95.0 $ (65.0) Term loan facility, September 2022 - LIBOR +150bps 280.1 294.7 (14.6) Bonds Payable: 5.125% Senior Not
Slide 30: Debt maturity profile - face value
Debt maturity profile - face value As of Dec. 31, 2018* Callable beginning September 2020 ($ in millions) Callable beginning November 2017 $633 Available $1,200 Callable beginning Senior March 2018 Notes 5.75% $30 Drawn + Revolver $37 reserved capacity for LC’s $300 Senior $350 Senior $280 Term Loan
Slide 31: New-store/same-store growth Inpatient Rehabilitation
New-store/same-store growth Inpatient Rehabilitation Reliant (857 beds) 25.0 Franklin, TN (40 beds) Bryan, TX (49 beds) Broken Arrow, OK (22 beds) Shelby County, AL (34 beds) Bluffton, SC (38 beds) 20.0 Hot Springs, AR (27 beds) Pearland, TX 15.0 Gulfport, MS (33 beds) (40 beds) Westerville, OH (60
Slide 32: New-store/same-store growth Home Health
New-store/same-store growth Home Health Acquired CareSouth 70.0 (44 home health locations in 7 states) in November 2015 60.0 50.0 40.0 Acquired Camellia Healthcare (14 home health locations in 3 states) 30.0 in May 2018 20.0 10.0 0.0 Admissions Q12016 Q1 2016 Q22016 Q2 2016 Q3 2016 Q3 2016 Q4 2016 Q
Slide 33: Payment sources (percent of revenues)
Payment sources (percent of revenues) Inpatient Home Health Rehabilitation and Hospice Consolidated Segment Segment Q4 Q4 Q4 Full Year 2018 2017 2018 2017 2018 2017 2018 2017 Medicare 73.4% 74.0% 85.0% 86.9% 76.0% 76.9% 75.9% 76.0% Medicare Advantage 9.5% 8.2% 9.6% 8.9% 9.5% 8.3% 9.2% 8.6% Managed c
Slide 34: Inpatient rehabilitation operational and labor metrics
Inpatient rehabilitation operational and labor metrics Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2018 2018 2018 2018 2017 2017 2017 2017 2018 2017 (In Millions) Net patient revenue- inpatient $ 822.8 $ 798.4 $ 809.6 $ 817.1 $ 776.9 $ 758.2 $ 751.5 $ 752.7 $ 3,247.9 $ 3,039.3 Net patient revenue- outpatient
Slide 35: Home health and hospice operational metrics
Home health and hospice operational metrics Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2018 2018 2018 2018 2017 2017 2017 2017 2018 2017 (In Millions) Net home health revenue $ 215.3 $ 209.2 $ 204.8 $ 185.3 $ 186.3 $ 180.3 $ 171.9 $ 163.9 $ 814.6 $ 702.4 Net hospice revenue 35.0 32.8 28.3 20.4 20.1 17.8 16.9
Slide 36: Share information
Share information Weighted Average for the Period Q4 Full Year 2018 2017 2018 2017 2016 Basic shares outstanding(19) 98.0 97.6 97.9 93.7 89.1 Convertible senior subordinated notes(19) — — — 4.0 8.5 Restricted stock awards, dilutive stock options, restricted stock units, and common stock warrants 2.0
Slide 37: Segment operating results
Segment operating results Q4 2018 Q4 2017 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 845.7 $ 250.3 $ — $ 1,096.0 $ 802.4 $ 206.4 $ — $ 1,008.8 Operating Expenses: Inpatient Rehabilitation: Salaries and
Slide 38: Segment operating results
Segment operating results Year Ended December 31, 2018 Year Ended December 31, 2017 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 3,346.2 $ 931.1 $ — $ 4,277.3 $ 3,141.3 $ 772.6 $ — $ 3,913.9 Operating Exp
Slide 39: Reconciliation of net income to Adjusted EBITDA (2018)
Reconciliation of net income to Adjusted EBITDA(7) 2018 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 $ 105.2 $ 113.2 $ 109.3 $ 47.7 $ 375.4 Loss (income) from disc ops, net of tax, attributable t
Slide 40: Reconciliation of net income to Adjusted EBITDA (2017)
Reconciliation of net income to Adjusted EBITDA(7) 2017 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 $ 84.4 $ 79.4 $ 85.1 $ 86.5 $ 335.4 Loss (income) from disc ops, net of tax, attributable to E
Slide 41: Net cash provided by operating activities reconciled to Adjusted EBITDA
Net cash provided by operating activities reconciled to Adjusted EBITDA Q4 Full Year (In Millions) 2018 2017 2018 2017 Net cash provided by operating activities $ 178.4 $ 151.4 $ 762.4 $ 658.3 Interest expense and amortization of debt discounts and fees 36.7 35.9 147.3 154.4 Equity in net income of
Slide 42: Reconciliation of segment Adjusted EBITDA to income 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, 2018 2017 2018 2017 (In Millions) Total segment Adjusted EBITDA $ 255.8 $ 241.5 $ 1,034.3 $ 947.1 General and administrative expenses (54.3
Slide 43: Reconciliation of net cash from operating activities to adjusted free cash flow
Reconciliation of net cash provided by operating activities to adjusted free cash flow(6) Q4 Full Year (In Millions) 2018 2017 2018 2017 Net cash provided by operating activities $ 178.4 $ 151.4 $ 762.4 $ 658.3 Impact of discontinued operations (1.5) (0.1) (0.8) 0.6 Net cash provided by operating ac
Slide 44: Adjusted EPS - Q4 2018
Adjusted EPS(4) - Q4 2018 For the Three Months Ended December 31, 2018 Mark-to- Market Change in Gov’t, Class Adjustment Fair Market Action, & for Stock Value of As Related Compensation Income Tax Equity As Reported Settlements Expense Adjustments Securities(2) Adjusted (In Millions, Except Per Shar
Slide 45: Adjusted EPS - Q4 2017
Adjusted EPS(4) - Q4 2017 For the Three Months Ended December 31, 2017 Adjustments Mark-to- Market Adjustment As for SARs (see Income Tax Tax Reform As Reported page 20) Adjustments Impact(5) Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 208.2 $ — $ — $ — $ 208.2 Depreciation an
Slide 46: Adjusted EPS - YTD 2018
Adjusted EPS(4) - YTD 2018 For the Year Ended December 31, 2018 Adjustments Gov’t, Class Mark-to- Change in Action, & Market Adjust. FMV of As Related for Stock Income Tax Transaction Equity As Reported Settlements Comp Expense Adjustments Costs Securities(2) Adjusted (In Millions, Except Per Share
Slide 47: Adjusted EPS - YTD 2017
Adjusted EPS(4) - YTD 2017 Year Ended December 31, 2017 Adjustments Mark-to- Market Adjustment Tax Loss on Early As for SARs (see Reform Extinguishment Income Tax As Reported page 20) Impact(5) of Debt Adjustments Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 823.1 $ — $ — $ — $
Slide 48: End notes
End notes (1) Based on recent discussions with DOJ, the Company established a reserve of $48 million in the fourth quarter of 2018 for the potential settlement of the investigation initially disclosed in March 2013. As previously disclosed, since 2013, the Company has been cooperating with an invest
Slide 49: End notes, con't.
End notes, con’t. (8) On July 21, 2016, the board of directors approved a $0.01 per share, or 4.3%, increase to the quarterly cash dividend on the Company’s common stock, bringing the quarterly cash dividend to $0.24 per common share. On July 20, 2017, the board of directors approved a $0.01 per sha
Slide 50: End notes, con't.
End notes, con’t. (17) Represents home health admissions from 218 consolidated locations in Q4 2018; 214 consolidated locations in Q3 2018; 213 consolidated locations in Q2 2018; 196 consolidated locations in Q1 2018; 198 consolidated locations in Q4 2017; 196 consolidated locations in Q3 2017; and