Encompass Health Corporation · NYSE:EHC
Encompass Health — HealthSouth — J.P. Morgan Healthcare Conference 2015
37 slides from Encompass Health's conference presentation, Jan 13, 2015
Slide 1: J. P. Morgan Healthcare Conference
J. P. Morgan Healthcare Conference San Francisco, CA January 13, 2015 Jay Grinney, President and Chief Executive Officer
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 our current outlook, views and plans with respect to future events, including legislative and regulatory developments, strategy, capit
Slide 3: Company Overview
Company Overview (1) Inpatient Rehabilitation Hospitals Encompass Home Health Encompass Hospice Encompass Pediatrics New Inpatient Rehabilitation Hospitals under development Encompass Inpatient Rehabilitation Home Health and Hospice (1) Portfolio - As of December 31, 2014 IRF Marketshare Portfolio –
Slide 4: HealthSouth's Strategy: 5-Year Track Record of Consistent Results
HealthSouth's Strategy: 5-Year Track Record of Consistent Results Business Model (2009 to 2013): Shareholder Distributions Shareholder ü Adjusted EBITDA CAGR: 4% - 8% Distributions ü Strong free cash flow Strong Balance Sheet Adjusted EBITDA (1) Adjusted Free Cash Flow (2) Strategy Component ($milli
Slide 5: 2014 Highlights
2014 Highlights Shareholder Distributions ü Increased the quarterly cash dividend on Shareholder Distributions our common stock 16.7% to $0.21 per share Strong Balance Sheet effective with the October 2014 dividend ü Repurchased $43.1 million of common stock Strategy Component (1,303,201 shares) Cor
Slide 6: 2014 Highlights (continued)
2014 Highlights (continued) Shareholder Distributions Shareholder Distributions Strong Balance Sheet ü Redeemed all of the 7.25% senior notes (approx. $271 million) due 2018 and approx. $25 million of the 7.75% senior notes due 2022 Strategy Component Core Core Growth ü Utilized balance sheet capaci
Slide 7: 2014 Highlights (continued)
2014 Highlights (continued) Shareholder Distributions ü Increased discharges by 3.5% Shareholder Distributions ü Opened three de novos: Strong Balance Sheet • Altamonte Springs, FL (50 beds) • Newnan, GA (50 beds) Strategy Component • Middletown, DE (34 beds) Core Core Growth Growth ü Acquired Quill
Slide 8: 2014 Highlights (continued)
2014 Highlights (continued) ü Acquired Encompass Home Health & Hospice • $750 million purchase price; $695.5 million Shareholder cash + $64.5 million Encompass management Distributions Shareholder equity roll Distributions Strong Balance • Transaction funded with expanded credit facility Sheet – $30
Slide 9: 2014 Highlights (continued)
2014 Highlights (continued) Shareholder ü Achieved consistently higher FIM® Gains(2) Distributions Shareholder HLS Average UDSMR Average(1) without HealthSouth Distributions Strong Balance Sheet 37.5 37.6 Strategy Component 35.6 36.4 36.8 Core Core 27.9 28.0 28.1 28.3 27.8 Growth Growth 3Q13 4Q13 1Q
Slide 10: 2014 Guidance - Adjusted EBITDA
2014 Guidance - Adjusted EBITDA(1) Original Guidance - 02/19/2014 Revised Guidance - 01/13/2015 $555 million to $565 million $575 million to $580 million Q4 2014 preliminary observations (2): ü Discharge growth of approx. 4.7% • New-store growth of 2.5% (impacted by delayed start-up at three hospita
Slide 11: 2014 Guidance – EPS
2014 Guidance – EPS (1) EPS Guidance Actual Low High (In Millions, Except Per Share Data) 2013 2014 Earnings per Share from Continuing Adjusted EBITDA $ 551.6 $ 575 $ 580 (2) Operations Attributable to HealthSouth Interest expense and amortization of debt discounts and fees (100.4) (109) $ 2.20 to $
Slide 12: Business Outlook: 2015 to 2017
Business Outlook: 2015 to 2017 (1) Business Model : • Adjusted EBITDA CAGR: 5% - 9% (2014 base year Adjusted EBITDA includes an estimate for Encompass)(2) • Continued strong free cash flow generation 2015 2016 2017 • Quarterly cash dividends Shareholder • Opportunistic repurchases Distributions ($20
Slide 13: Adjusted Free Cash Flow Assumptions
Adjusted Free Cash Flow(1) Assumptions We expect 2014 adjusted free Reflects: cash flow to be slightly lower than the $331 million (1) for • 2015 assumptions include the Encompass acquisition 2013 due to higher than • Continued spending on CIS installation anticipated accounts receivable in Q4 2014.
Slide 14: Priorities for Reinvesting Free Cash Flow
Priorities for Reinvesting Free Cash Flow ü Continued emphasis on inpatient rehabilitation core growth ü Additional emphasis on home health and hospice growth ($millions) 2015 2014 2013 Assumptions Estimates (1) Actuals IRF bed expansions $30 to $40 $24 $24.9 Growth in Core New IRF's Business - De n
Slide 15: New IRF's: De Novo Assumptions and Timing
New IRF's: De Novo (40-50 beds) Assumptions and Timing All projects have minimum IRR target of 15% (pre-tax). Investment Considerations • Prototype includes all private rooms • Cash Payback (1) = 5 to 7 years • A minimum of 30 patients treated for zero revenue • Inclusive of CON costs (where applica
Slide 16: New IRF's: Acquisition Assumptions and Timing
New IRF's: Acquisition Assumptions and Timing All projects have minimum IRR target of 15% (pre-tax). Investment Considerations Value Added • Price varies depending on size, market, and • TeamWorks approach to sales/marketing physical asset • Labor management tools and best practices • Cash Payback (
Slide 17: New Home Health and Hospice Acquisitions
New Home Health and Hospice Acquisitions Investment Considerations Value Added by Encompass • Highly fragmented home health market • Strengthen existing referral relationships; establish new - Over 12,000 home health agencies relationships - Approx. 95% of these have annual revenue of • Install/enha
Slide 18: Future Growth: Coordinated Care Delivery Models
Future Growth: Coordinated Care Delivery Models Positioned to succeed in coordinated care delivery models by offering both "facility-based" and "home-based" post-acute services High-quality, cost-effective IRF provider: High-quality, cost-effective home care provider: • FIM® gains consistently excee
Slide 19: Appendix
19 Appendix HEALTHSOUTH.
Slide 20: Acquisition of Encompass Home Health & Hospice - Transaction Summary
Acquisition of Encompass Home Health & Hospice - Transaction Summary • 5th largest provider of Medicare-focused (82% Medicare) skilled home health services in the U.S. with 135 locations • Approx. 4,900 employees making over 2.1 million total patient visits annually • Approx. revenue of $370 million
Slide 21: Acquisition of Encompass Home Health & Hospice - Strategic Rationale
Acquisition of Encompass Home Health & Hospice - Strategic Rationale ü New growth opportunity: $33.5 billion in Medicare spending on home health and hospice services ü Brings together two best-of-class, post-acute providers with regard to patient outcomes and operating efficiency ü Compatible corpor
Slide 22: Encompass Home Health & Hospice
Encompass Home Health & Hospice Revenue (1) Medicare: 82% Payor Mix (1) $370 $302 Medicaid: 8% Managed Care/ MA/Other: 10% 2013 2014 Admissions Total Episodes Hospice Daily Census 49,007 98,627 387 39,350 80,594 268 Visits per Episode 21.0 20.4 2013 2014 2013 2014 2013 2014 (1) Revenue for 2014 is e
Slide 23: HealthSouth and Encompass Market Overlap
HealthSouth and Encompass Market Overlap Approx. 54% or approx. 72,300 (1) of HealthSouth's discharges went to home health in 2014. Approx. 5,900 discharges, or 8%, went to HealthSouth home health. Approx. 850 discharges, or 1%, went to Encompass home health. ~72,300 Discharges 55% of Encompass' loc
Slide 24: Business Outlook: IRF Revenue Assumptions
Business Outlook: IRF Revenue Assumptions Revenue Volume Payor Mix by Discharges • 2.5% to 3.5% annual growth (excludes acquisitions) • Includes bed expansions, de Medicare novos and unit consolidations 72% Medicare Pricing FY 2015 (3) FY 2016 FY 2017 Q414 - Q315 Q415 - Q316 Q416 - Q317 Managed Care
Slide 25: Business Outlook: IRF Expense Assumptions
Business Outlook: IRF Expense Assumptions Expense Salaries & Benefits (1) Hospital Expenses • Other operating expenses and 2015 2016 2017 supply costs tracking with inflation Merit increases 2.0-2.5% 2.5-3.0% 2.5-3.0% • Occupancy costs declining as a Benefit costs increases 5-8% 5-8% 5-8% percent of
Slide 26: Income Tax Considerations
Income Tax Considerations GAAP Considerations: • As of 9/30/14, the Company’s federal NOL had a gross balance of approx. $688 million. • The Company has a remaining valuation allowance of approx. $30 million related to state NOLs. • The Encompass acquisition includes an approx. $40 million (NPV) tax
Slide 27: Priorities for Reinvesting Free Cash Flow
Priorities for Reinvesting Free Cash Flow « 2015 2014 2013 Assumptions Estimates (1) Actuals Highest Priority Growth IRF bed expansions $30 to $40 $24 $24.9 Remains New IRF's in Core - De novos 40 to 60 53 26.6 Business - Acquisitions TBD 20 28.9 New home health and hospice — acquisitions 30 to 40 6
Slide 28: Debt Maturity Profile
Debt Maturity Profile HealthSouth is positioned with a cost-efficient, flexible capital structure. Preliminary Dec. 31, 2014 (1) Call schedule: ($ in millions) • February 15, 2015 (price 104.063) • February 15, 2016 (price 102.708) • February 15, 2017 (price 101.354) $243 • February 15, 2018 and the
Slide 29: Debt and Liquidity
Debt and Liquidity Total Debt Liquidity (billions) Preliminary Dec. 31, Dec. 31, 2014 2013 4.6x Cash Available $ 47.5 $ 64.5 Revolver and Term Loan 3.7x Total $ 1,050.0 $ 600.0 (1) Leverage Ratio Less: - Draws (775.0) (45.0) - Letters of Credit (31.8) (36.5) Available $ 243.2 $ 518.5 $2.13 Total Liq
Slide 30: Debt Schedule
Debt Schedule Credit Rating Preliminary Change in S&P Moody's Dec. 31 Dec. 31, Debt vs. (1) (Millions) Corporate BB- Ba3 2014 2013 YE 2013 Advances under $600 million revolving credit facility, September 2019 - 1 Month LIBOR +175bps (1) BB+ Baa3 $ 325.0 $ 45.0 $ 280.0 Term loan facility, September 2
Slide 31: Adjusted Free Cash Flow History
Adjusted Free Cash Flow History (1) Q3 9 Months Full Year (Millions) 2014 2013 2014 2013 2013 2012 2011 2010 2009 Net cash provided by operating activities $ 139.6 $ 142.6 $ 374.7 $ 369.4 $ 470.3 $ 411.5 $ 342.7 $ 331.0 $ 406.1 Impact of discontinued operations (0.2) 1.2 1.0 1.4 1.9 (2.0) (9.1) (13.
Slide 32: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA (1) 2014 Q1 Q2 Q3 9 Months Per Per Per Per (in millions, except per share data) Total Share Total Share Total Share Total Share Net Income $ 61.5 $ 97.9 $ 64.8 $ 224.2 Loss (income) from disc ops, net of tax, attributable to HealthSouth 0.1 (3.8) 0.9 (
Slide 33: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA (1) 2013 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 $ 65.9 $ 179.0 $ 72.3 $ 64.2 $ 381.4 Loss (income) from disc ops, net of tax, attributable to
Slide 34: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA (1) 2012 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 $ 56.8 $ 59.9 $ 59.9 $ 59.3 $ 235.9 Loss (income) from disc ops, net of tax, attributable to
Slide 35: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA (1) 2011 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 $ 91.5 $ 32.3 $ 68.3 $ 62.5 $ 254.6 (Income) loss from disc ops, net of tax, attributable to
Slide 36: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA (1) 2009 2010 (in millions, except per share data) Total Per Share Total Per Share Net income $ 128.8 $ 939.8 Income from disc ops, net of tax, attributable to HealthSouth (17.7) (9.2) Net income attributable to noncontrolling interests (34.0) (40.8) I
Slide 37: Reconciliation Notes for Slides 32 - 36
Reconciliation Notes for Slides 32 - 36 1. Adjusted EBITDA is a non-GAAP financial measure. The Company’s leverage ratio (total consolidated debt to Adjusted EBITDA for the trailing four quarters) is, likewise, a non-GAAP financial measure. Management and some members of the investment community uti