Encompass Health Corporation · NYSE:EHC
Encompass Health — Q4 2017 Earnings Presentation
50 slides from Encompass Health's earnings presentation, Feb 27, 2018
Slide 1: Fourth Quarter 2017 Earnings Call
Fourth Quarter 2017 Earnings Call February 27, 2018 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 2017 Summary............................................................................................................... 4-5 Rebranding and Name Change ................................................................................................ 6 Clinical Collaboration Ra
Slide 4: Q4 2017 Summary
Q4 2017 Summary Q4 Full Year (In Millions) Q4 2017 Q4 2016 Growth 2017 2016 Growth Encompass Health Consolidated Net operating revenues $ 1,019.7 $ 949.9 7.3% $ 3,971.4 $ 3,707.2 7.1% Adjusted EBITDA $ 208.2 $ 198.8 4.7% $ 823.1 $ 793.6 3.7% Inpatient Rehabilitation Segment Net operating revenues $
Slide 5: Q4 2017 Summary (cont.)
Q4 2017 Summary (cont.) u Expansion Activity (see page 23) – Began operating a new 40-bed inpatient rehabilitation hospital in Pearland, TX – Expanded existing inpatient rehabilitation hospitals by 63 beds – Acquired two home health locations in Georgia and Alabama u Balance Sheet – Leverage ratio o
Slide 6: Rebranding and Name Change
Rebranding and Name Change u The Company’s rebranding and name change reinforce its existing strategy and position as an integrated provider of inpatient and home-based care. Effective January 1, 2018, HealthSouth Corporation changed its name to Encompass Health Corporation, with a corresponding t
Slide 7: Improving 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% u As of December 31, 2017, ~60% of Encompass Collaboration Rate Health’s inpatient rehabilitation hospitals were 28
Slide 8: Inpatient Rehabilitation Segment - Revenue
Inpatient Rehabilitation Segment - Revenue Q4 Q4 Favorable/ ($millions) 2017 2016 (Unfavorable) Net operating revenues: Inpatient $ 784.7 $ 740.9 5.9% Outpatient and other 26.1 26.7 (2.2%) Total segment revenue $ 810.8 $ 767.6 5.6% (Actual Amounts) Discharges 43,910 41,474 5.9% Same-store discharge
Slide 9: Inpatient Rehabilitation Segment - Adjusted EBITDA
Inpatient Rehabilitation Segment - Adjusted EBITDA Q4 Q4 % of % of ($millions) 2017 Revenue 2016 Revenue Net operating revenues $ 810.8 $ 767.6 u Segment Adjusted EBITDA for Less: Provision for doubtful accounts (8.4) 1.0% (13.2) 1.7% the quarter of $207.1 million Net operating revenues less provisi
Slide 10: Home Health and Hospice Segment - Revenue
Home Health and Hospice Segment - Revenue Q4 Q4 Favorable/ ($millions) 2017 2016 (Unfavorable) Net operating revenues: Home health revenue $ 187.3 $ 165.2 13.4 % Hospice revenue 21.6 17.1 26.3 % Total segment revenue $ 208.9 $ 182.3 14.6 % (Actual Amounts) Admissions 31,766 27,957 13.6 % Same-store
Slide 11: Home Health and Hospice Segment - Adjusted EBITDA
Home Health and Hospice Segment - Adjusted EBITDA Q4 Q4 % of % of ($millions) 2017 Revenue 2016 Revenue Net operating revenues $ 208.9 $ 182.3 Less: Provision for doubtful accounts (1.3) 0.6% (1.3) 0.7% Net operating revenues less provision for doubtful accounts 207.6 181.0 u Segment Adjusted EBITDA
Slide 12: Consolidated Adjusted EBITDA
Consolidated Adjusted EBITDA Consolidated Adjusted EBITDA for the quarter of $208.2 million u General and administrative expenses increased as a percent of consolidated revenue primarily due to a year-over-year increase in incentive compensation, as well as expenses associated with the Company’s reb
Slide 13: Earnings per Share - As Reported
Earnings per Share - As Reported u EPS for the fourth quarter of 2017 were impacted by: Q4 Year Ended Lower interest expense due primarily to (In Millions, Except Per Share Data) 2017 2016 2017 2016 the Company’s exercise of its early Consolidated Adjusted EBITDA $ 208.2 $ 198.8 $ 823.1 $ 793.6 re
Slide 14: Adjusted Earnings per Share
Adjusted Earnings per Share(4) Q4 Year Ended 2017 2016 2017 2016 Earnings per share, as reported $ 0.61 $ 0.68 $ 2.69 $ 2.59 Adjustments, net of tax: Professional fees — accounting, tax, and legal — — — 0.01 Mark-to-market adjustment for stock appreciation rights(5) — 0.02 0.08 0.01 Income tax adjus
Slide 15: 2017 Adjusted Free Cash Flow
2017 Adjusted Free Cash Flow(7) $47.6 $12.7 $29.5 ($62.6) ($34.1) $474.5 $467.6 Adjusted Free Cash Adjusted Working Capital Cash Interest Cash Tax Maintenance Adjusted Free Cash Flow FY 2016 (7) EBITDA and Other Expense Payments, Capital Expenditures Flow FY 2017 Net of Refunds u Adjusted free cash
Slide 16: Guidance
Guidance 2018 2017 Actuals Guidance Net Operating Revenues* Net Operating Revenues* $3,971.4 million $4,150 million to $4,250 million Adjusted EBITDA(8) Adjusted EBITDA(8) $823.1 million $830 million to $850 million Adjusted Earnings per Share Adjusted Earnings per Share from Continuing Operations f
Slide 17: 2018 Guidance Considerations
2018 Guidance Considerations Inpatient Rehabilitation Home Health and Hospice u Estimated 0.8% increase in Medicare pricing u Estimated 0.5% net Medicare pricing for Q1 through Q3; ~1.25% for Q4 reduction for CY 2018 u Salary increase of ~3.0%; benefits increase u Salary increase of ~3.0%; benefits
Slide 18: Adjusted Free Cash Flow Assumptions
Adjusted Free Cash Flow(7) Assumptions Certain Cash Flow Items 2018 2017 Actuals (millions) Assumptions • Cash interest expense (net of amortization of debt discounts $145.7 $140 to $150 and fees) u Increased cash payments for taxes in 2018 primarily due to exhaustion of federal NOL in Q1 2017 • Cas
Slide 19: Uses of Free Cash Flow
Uses of Free Cash Flow 2017 2018 Actuals Assumptions IRF bed expansions $25.5 $30 to $40 New IRFs - De novos 75.2 80 to 110 Growth in - Acquisitions 10.9 opportunistic Core - Replacement IRFs and other 9.7 40 to 50 Business New home health and hospice acquisitions 27.9 50 to 100 Net redemptions in 2
Slide 20: Appendix
Appendix
Slide 21: Encompass Health Map of Locations
Encompass Health Aand Leading Provider of Inpatient Rehabilitation Home-Based Care Market Overlap ~60% of EHC’s IRFs have an EHC home health location within a 30-mile radius.* Portfolio as of December 31, 2017 Inpatient Rehabilitation Hospitals (“IRFs”) Home Health Locations Hospice Locations 7 Futu
Slide 22: Pre-Payment Claims Denials - Inpatient Rehabilitation Segment
Pre-Payment Claims Denials - Inpatient Rehabilitation Segment Background Encompass Health reserves pre-payment claim denials via the provision • For several years, under programs designated as “widespread probes,” for doubtful accounts upon notice from a MAC a claim is under review. certain Medicare
Slide 23: Expansion Activity
Expansion Activity Inpatient Rehabilitation Facilities 7 Previously Announced 3 New States # of New Beds IRF Development 2017 2018 2019 Projects Underway De Novo: Pearland, TX (October) 40 — — 1 Shelby County, AL — 34 — 2 Hilton Head, SC — 38 — Q4 2017 expansion activity highlights: 3 Murrieta, CA —
Slide 24: Estimated Impact of the New Revenue Recognition Accounting Standard
Estimated Impact of the New Revenue Recognition Accounting Standard u During the first quarter of 2018, Encompass Health will adopt a new accounting standard (ASC 606 - Revenue from Contracts with Customers) which clarifies the standards for recognizing revenue. u Based on the Company's current eval
Slide 25: Business Outlook: 2018 to 2020
Business Outlook: 2018 to 2020 2018 2019 2020 • Implement rebranding and name change • Develop and implement post-acute patient navigation tools Key • Enhance clinical collaboration between the Company’s IRFs and home health Operational locations, including TEAMWORKS initiative to extend best practi
Slide 26: Business Outlook 2018 to 2020: Revenue Assumptions
Business Outlook 2018 to 2020: Revenue Assumptions Inpatient Rehabilitation* Home Health* Volume (Includes New Stores) 3+% annual discharge growth 10+% annual admission growth Approx. 73% of Revenue Approx. 85% of Revenue Medicare Pricing FY 2018 FY 2019 FY 2020 CY 2018 CY 2019 CY 2020 Q418-Q319 Q41
Slide 27: Business Outlook 2018 to 2020: Labor and Other Expense Assumptions
Business Outlook 2018 to 2020: Labor and Other Expense Assumptions Inpatient Rehabilitation Home Health and Hospice Salaries and Benefits 2018 2019 2020 Salary increases 2.75-3.25% 2.75-3.25% 2.75-3.25% Benefit costs increases 8-12%* 5-10% 5-10% % of Salaries and Benefits Salaries Salaries Salaries
Slide 28: Debt Schedule
Debt Schedule Change in December 31, December 31, Debt vs. ($millions) 2017 2016 YE 2016 Advances under $700 million revolving credit facility, September 2022 - LIBOR +150bps $ 95.0 $ 152.0 $ (57.0) Term loan facility, September 2022 - LIBOR +150bps 294.7 421.2 (126.5) Bonds Payable: 5.125% Senior N
Slide 29: Debt Maturity Profile - Face Value
Debt Maturity Profile - Face Value As of December 31, 2017* Callable beginning September 2020 ($ in millions) Callable beginning November 2017 $570 Available $1,200 Callable beginning Senior March 2018 Notes 5.75% $95 Drawn + Revolver $35 reserved Capacity for LC’s $300 Senior $350 Senior $295 Notes
Slide 30: Overview of Rollover Shares Held by Home Health and Hospice Management
Overview of Rollover Shares 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-acquisition en
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) Pearland, TX 20.0 Hot Springs, AR (27 beds) (40 beds) Gulfport, MS (33 beds) 15.0 Lexington, KY (158 beds) Westerville, OH (60 beds) Savannah, GA (50 bed
Slide 32: New-Store/Same-Store Growth Home Health
New-Store/Same-Store Growth Home Health Acquired CareSouth 70.0 (44 home health agencies in 7 states) in November 2015 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Admissions Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 New Stor
Slide 33: Payment Sources (Percent of Revenues)
Payment Sources (Percent of Revenues) Inpatient Home Health and Rehabilitation Consolidated Hospice Segment Segment Q4 Q4 Q4 Full Year 2017 2016 2017 2016 2017 2016 2017 2016 Medicare 73.6% 73.3% 86.1% 84.3% 76.2% 75.3% 75.5% 75.2% Medicare Advantage 8.3% 7.8% 8.9% 8.7% 8.4% 8.0% 8.7% 7.9% 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 2017 2017 2017 2017 2016 2016 2016 2016 2017 2016 (In Millions) Net patient revenue- inpatient $ 784.7 $ 768.6 $ 762.9 $ 766.2 $ 740.9 $ 724.1 $ 721.2 $ 719.4 $ 3,082.4 $ 2,905.5 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 2017 2017 2017 2017 2016 2016 2016 2016 2017 2016 (In Millions) Net home health revenue $ 187.3 $ 181.2 $ 172.9 $ 165.3 $ 165.2 $ 162.0 $ 157.1 $ 150.9 $ 706.7 $ 635.2 Net hospice and other revenue 21.6 19.6 18.4 17.0 17.1
Slide 36: Share Information
Share Information Weighted Average for the Period Q4 Full Year 2017 2016 2017 2016 2015 Basic shares outstanding(20) 97.6 88.6 93.7 89.1 89.4 Convertible perpetual preferred stock (21) — — — — 1.0 Convertible senior subordinated notes(20) — 8.6 4.0 8.5 8.3 Restricted stock awards, dilutive stock opt
Slide 37: Segment Operating Results
Segment Operating Results Q4 2017 Q4 2016 Home Home Health and Health and IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 810.8 $ 208.9 $ — $ 1,019.7 $ 767.6 $ 182.3 $ — $ 949.9 Less: Provision for doubtful accounts (8.4) (1.3) — (9.7) (13.2) (1.3) — (1
Slide 38: Segment Operating Results
Segment Operating Results Year Ended December 31, 2017 Year Ended December 31, 2016 Home Home Health and Health and IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 3,188.1 $ 783.3 $ — $ 3,971.4 $ 3,021.1 $ 686.1 $ — $ 3,707.2 Less: Provision for doubtfu
Slide 39: Reconciliation of Net Income to Adjusted EBITDA (2017)
Reconciliation of Net Income to Adjusted EBITDA(8) 2017 Q1 Q2 Q3 Q4 Full Year (in millions, except per share data) Total Per Share Total Per Share Total Per Share Total Per Share Total Per 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 40: Reconciliation of Net Income to Adjusted EBITDA (2016)
Reconciliation of Net Income to Adjusted EBITDA(8) 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 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) 2017 2016 2017 2016 Net cash provided by operating activities $ 151.4 $ 135.0 $ 657.2 $ 634.4 Provision for doubtful accounts (9.7) (14.5) (52.4) (61.2) Professional fees — accounting, tax, and legal —
Slide 42: Reconciliation of Segment Adjusted EBITDA to Income Before Income Tax
Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations Before Income Tax Expense Three Months Ended Year Ended December 31, December 31, 2017 2016 2017 2016 (In Millions) Total segment Adjusted EBITDA $ 241.5 $ 225.6 $ 947.1 $ 899.6 General and administrative expenses (43.1)
Slide 43: Reconciliation of Operating Cash Flow to Adjusted Free Cash Flow
Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow(7) Q4 Full Year (In Millions) 2017 2016 2017 2016 Net cash provided by operating activities $ 151.4 $ 135.0 $ 657.2 $ 634.4 Impact of discontinued operations (0.1) 0.1 0.6 0.7 Net cash provided by operating activi
Slide 44: Adjusted EPS - Q4 2017
Adjusted EPS(4) - Q4 2017 For the Three Months Ended December 31, 2017 Adjustments Mark-to- Market Adjustment for Stock Appreciation Income Tax Tax Reform As Reported Rights(5) Adjustments(6) Impact(2) As Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 208.2 $ — $ — $ — $ 208.2 De
Slide 45: Adjusted EPS - Q4 2016
Adjusted EPS(4) - 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 and As Appreciation Assets and Other As Reported Rights(5) Hospital Adjustments Adjusted (In Millions, Except Per Share Amounts)
Slide 46: Adjusted EPS - YTD 2017
Adjusted EPS(4) - YTD 2017 For the Year Ended December 31, 2017 Adjustments Mark-to- Market Adjustment for Stock Loss on Early As Appreciation Tax Reform Extinguishment Income Tax As Reported Rights(5) Impact(2) of Debt Adjustments(6) Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA
Slide 47: Adjusted EPS - YTD 2016
Adjusted EPS(4) - YTD 2016 For the Year Ended December 31, 2016 Adjustments Mark-to- Sale of Pro. Market Pediatric Fees — Adjustment Loss on Home Income Tax Acct., for Stock Early Health Valuation and As Tax, & Appreciation Exting. Assets and Other As Reported Legal Rights(5) of Debt Hospital Adjust
Slide 48: End Notes
End Notes (1) In the first quarter of 2017, approximately $1 million associated with the TeamWorks clinical collaboration initiative was included in operating expenses within the inpatient rehabilitation segment. Total costs to the Company in 2017 for the TeamWorks clinical collaboration initiative
Slide 49: End Notes, con't.
End Notes, con’t. (7) Definition of adjusted free cash flow, which is a non-GAAP measure, is net cash provided by operating activities of continuing operations minus capital expenditures for maintenance, dividends paid on preferred stock, distributions to noncontrolling interests, and certain other
Slide 50: End Notes, con't.
End Notes, con’t. (14) Data provided by Uniform Data System for Medical Rehabilitation, a division of UB Foundation Activities, Inc., a data gathering and analysis organization for the rehabilitation industry; represents ~70% of industry, including Encompass Health inpatient rehabilitation sites (15