Encompass Health Corporation · NYSE:EHC
Encompass Health — HealthSouth — Investor Day (November 2008)
63 slides from Encompass Health's investor day presentation, Nov 10, 2008
Slide 1: HealthSouth Investor Day
1 HealthSouth Investor Day November 10, 2008 Exhibit 99.1
Slide 2: Note Regarding Forward-Looking Statements
2 Note Regarding Forward-Looking Statements The information contained in this presentation includes certain estimates, projections and other forward- looking information that reflect our current views with respect to future events and financial performance. These estimates, projections and other for
Slide 3: HealthSouth Leadership
3 HealthSouth Leadership Jay Grinney President and Chief Executive Officer John Workman Executive Vice President and Chief Financial Officer Mark Tarr Executive Vice President, Operations John Whittington Executive Vice President, General Counsel and Secretary
Slide 4: Agenda
4 8:30 a.m. Strategy and Landscape Questions and Answers 9:40 a.m. Break 9:45 a.m. Operational Model Questions and Answers 10:40 a.m. Break 10:45 a.m. Financial Model Questions and Answers 11:50 a.m. Litigation Update Questions and Answers 12:00 p.m. Closing Remarks Questions and Answers Agenda Jay
Slide 5: Strategy and Landscape
5 Strategy and Landscape Jay Grinney – President and Chief Executive Officer Topics Covered : HealthSouth: Past and Present Post-Acute Industry and Inpatient Rehabilitation Sector Strategy and Business Model Political & Regulatory Landscape Investment Considerations Questions and Answers
Slide 6: HealthSouth Today
Operational Components Q3 YTD Key Statistics Largest Provider of Inpatient Rehabilitative Healthcare Services in the U.S. 6 HealthSouth Today IRH LTCH 93 Rehabilitation Hospitals and Outpatient Departments 6 LTCH Hospitals 55 Outpatient Satellites 25 Hospital-Based Home Health Agencies $1.38B Net Op
Slide 7: Turnaround timeline
Reached SEC Settlement Filed 2000 – 2003 Form 10-K Secured New Bank Credit $2.55B Completed $1B Senior Notes Offering Announced Divestitures $440M Tax Recovery Received Relisted on NYSE Completed Divestitures All Settlements Paid in Full Reached Securities Litigation Settlement Corporate Campus Sold
Slide 8: Healthcare Services Continuum
8 Healthcare Services Continuum Wellness Programs Disease Management Genetic research O/P Surgery O/P Imaging O/P Rehabilitation Renal dialysis O/P Cardiac O/P Laboratory General, acute care hospitals Specialty hospitals (e.g. Cardiac, Orthopedic, etc) Inpatient Rehabilitation Long-term acute care H
Slide 9: Post Acute Industry Components
9 Post Acute Industry Components (1) Source: MedPAC , A Data Book: Healthcare Spending and the Medicare Program , June 2008 (Section 9). (2) These percents are Medicare spending only and do not include beneficiary copayments or other payors. 2007 Medicare Spending $45.1 Billion
Slide 10: IRF Segment: Fragmented Industry
Hospital-Based 983 (82%) HealthSouth 93 (8%) 10 IRF Segment: Fragmented Industry Total Inpatient Rehabilitation Facilities (IRF): 1,201 Total Free-Standing Inpatient Rehabilitation Hospitals: 218 (HLS = 43%) Total Inpatient Rehabilitation Revenue: ~$9 Billion (1) Source: Medpac, Modern Healthcare, p
Slide 11: IRF Segment: Aging Demographics = Increased Demand
11 Projected percentage of US population 65 years or older through 2050 (1) (1) Source: US Census Bureau, 2004 (2) Source: Medicare Provider Analysis and Review File (2004); Claritas Projected Medicare Compliant Case Growth (2) IRF Segment: Aging Demographics = Increased Demand Demand for post-acute
Slide 12: Strategy
12 Strategy : To create shareholder value as the preeminent provider of rehabilitative care in the U.S. by: Creating a strong balance sheet through deleveraging; Driving organic growth through operational excellence; and Disciplined opportunistic growth. Longer term, we will pursue complementary acq
Slide 13: Strategy and business model targets
13 Achieve leverage of 4.5X or below by 12/31/10 Target ~ $35M maintenance CAPEX Target $15-20M for bed expansion Disciplined opportunistic growth Ensure hospital leadership inspires / motivates all constituents Differentiate by being the “Employer of Choice” Standardize best practices; deploy throu
Slide 14: Highlights: volume growth vs competitors
14 Highlights… HealthSouth has increased volumes, while competitors have shown declines. Change is Same-Store Discharges of HLS vs Non-HLS UDS Sites (1) % in Discharges (1) Data provided by UDS MR , a data gathering and analysis organization for the rehabilitation industry; represents ~ 65-70% of in
Slide 15: Highlights: new hospitals added
15 Highlights… HealthSouth has added new hospitals. (2) (1) Plan to work with a developer to obtain a lease arrangement (2) CON is being appealed; Operational Date may change 154 additional beds in total, 34 of which apply to third quarter 2008 Revenue contribution starting in Q3 2008 through Q3 201
Slide 16: Highlights: debt repaid and leverage reduced
Debt to Adjusted Consol. EBITDA 6.3x 5.5x 16 Highlights… HealthSouth has repaid significant debt and reduced its leverage. Debt Outstanding (in millions) $208.0 (1) Reconciliation to GAAP provided on slide 45
Slide 17: Political and Regulatory Landscape: How the sausage is made
17 Political and Regulatory Landscape: “How the sausage is made…” NOTE : CMS provides recommendations to HHS on Medicare and Medicaid policies / regulations (e.g. Congress establishing new IRF payment methodology) Healthcare Policy & Regulations Health & Human Services Legislative Directive Presiden
Slide 18: Political and Regulatory Landscape: Looking forward
18 Political and Regulatory Landscape: Looking forward CMS’s IRF-PPS staff currently focusing on report required by Medicare, Medicaid and SCHIP Extension Act of 2007 (“MMSEA”) Impact of 75% Rule on access to care Alternatives / refinements to Rule Analyzing types of patients best served by IRFs Hea
Slide 19: Investment Considerations
19 Investment Considerations: Turnaround Complete : all “legacy issues” resolved, management focused on operations and growth Strong Cash Flows : CAPEX spend is discretionary Deleveraging as Priority : reduce leverage to 4.5x or less by YE 2010 Solid Organic Growth : TeamWorks initiative will help u
Slide 20: Questions & Answers
20 Questions & Answers
Slide 21: Break
21 HealthSouth Investor Day BREAK (Back at 9:45 a.m. EST)
Slide 22: Operational Performance
22 Operational Performance Topics Covered : Our Business – “The Basics” “Typical” HealthSouth Rehab Hospital Patients We Serve Payors and Reimbursement Methodologies Sources of Patients Explained Our Competitors IRF vs SNF Quality Measures Operational Agenda (2009 – 2011) Mark Tarr – Executive Vice
Slide 23: What is a typical HealthSouth rehabilitation hospital?
23 “The Basics”: What is a “typical” HealthSouth rehabilitation hospital? Major Services Physician : manages and treats medical needs of patients Rehabilitation Nursing : oversees treatment program of patient Physical Therapy : addresses physical function, mobility, safety Occupational Therapy : pro
Slide 24: What Kind of Patients Do We Treat?
24 Medicare Inpatient Rehabilitation Categories (RICs) “The Basics”: What Kind of Patients Do We Treat?
Slide 25: Who Pays Us and How Are We Paid?
Q3 YTD Payor Mix Payment Methodology 25 “The Basics”: Who Pays Us and How Are We Paid? Prospective Payment Systems (“PPS”) Payments based on Case Mix Groups (“CMGs”) Diagnosis of patient’s illness Fixed payment per CMG adjusted for: Acuity / severity Regional wage differential Per diems for “short s
Slide 26: How Do We Get Our Patients?
26 Acute care hospital attending physician and Case Managers play key role All IRF patients must meet medical necessity criteria All IRF patients must be medically stable and have potential to tolerate three hours of therapy per day (minimum) “The Basics”: How Do We Get Our Patients? 94% 5% 1% Refer
Slide 27: Standardized Best Practices: Sales and Marketing
27 = Standardized Best Practices Phase One: Sales and Marketing What We Did: Flowcharted activities Assigned HLS “experts” to drive process Streamlined processes Created new job descriptions Decentralized decision-making Developed comprehensive reporting Acute Care Hospitals Physician Offices Skille
Slide 28: Standardized Best Practices implementation results
28 (cont’d) Piloted in nine hospitals Made adjustments / refinements Began roll-out in Q4 2007 Realigned and trained employees Aligned compensation / rewards Monitored results Full installation effect seen after 60 days Implementation Cumulative # of Hospitals Fully Installed Quarter-over- Quarter Y
Slide 29: Our Hospitals Still Have Room for Growth
29 Our Hospitals Still Have Room for Growth Number of Hospitals at Varying Occupancy Levels Hospitals with greater than 85% occupancy are candidates for bed expansion We expect to add 65-75 beds by the end of 2009 and at least another 44 beds in 2010 Average cost per bed: With new construction = $10
Slide 30: Who Are Our Competitors?
30 “The Basics”: Who Are Our Competitors? Competitor IRFs Typically smaller units (10–20 beds) inside acute care hospital Often are orthopedic–focused Nursing Homes Primarily treat simple knee / hip replacements
Slide 31: How Are We Different Than Nursing Homes?
31 “The Basics”: How Are We Different (Better!) Than Nursing Homes? 8 consecutive hours per day (min.) 24 hours per day RN oversight and availability None Rehabilitation specialty expertise Nursing training, expertise 2.5 – 4.0 5.0 – 7.5 Nursing hours per patient per day Not required Required MD or
Slide 32: How Do We Measure Quality?
32 FIM Gain LOS Efficiency Source: UDSmr Database – On Demand Reports – YTD September 2008 * Benchmark = Expected, Risk Adjusted LOS Efficiency “The Basics”: How Do We Measure Quality?
Slide 33: Operational Objectives (2009 – 2011)
Operational Objectives (2009 – 2011) Clinical Excellence (Target: Stroke, Hip Fracture, Joint Replacement, Spine/Neurological Conditions and Cardiac) Efficient Operations Differentiated Service 33 – Phase II Most effective processes: Clinical Support Financial Highest productivity and most effective
Slide 34: Questions & Answers
34 Questions & Answers
Slide 35: Break
35 HealthSouth Investor Day BREAK (Back at 10:45 a.m. EST)
Slide 36: Key Financial Information
36 Key Financial Information Topics Discussed : YTD Earnings and Adjustments Revenue & Expense Trend Free Cash Flow Liquidity Use of Cash Debt Reduction Interest Expense and Swap Settlements Government, Class Action, and Related Settlements Tax Refunds & NOL’s Questions and Answers John Workman – Ex
Slide 37: Third quarter and nine months results summary
ard Qtr. = 3rd Qtr. = SMonths §=—§ Months (Millions) 2008 2007 2008 2007 Inpatient vais SF 304 SF i2t7 F 1.1555 Outpatient and other 447 47.9 197.5 147.4 Consolidated net operating $4502 § 4039 $ 13786 —F 7,302.9 Discharges 26,827 24,535 80,128 75,738 Net patientrevenue /discharge $ 15,339 $ 15504 $
Slide 38: Adjusted Consolidated EBITDA Results
38 Adjusted Consolidated EBITDA Results (1) Reconciliation to GAAP provided on slide 59 and slide 61 (2) Includes an $8.6 million gain on the sale of our investment in Source Medical (3) Adjusted EBITDA guidance was revised upward in the second quarter 2008 earnings release No change; benefit and no
Slide 39: Adjusted Income per Share Results
39 Adjusted Income per Share Results (1) Reconciliation to GAAP provided on slide 59 and slide 61 (2) Q3 2007 calculated ignoring the antidilutive impact of negative EPS
Slide 40: Nine Months 2008 Statistics
40 Nine Months 2008 Statistics Revenue Volume Occupied Bed FTE EBITDA + 5.8% +5.8% -2.4% 7.6% 8.2% Revenue and volume reflecting strong growth. Improving productivity (EPOB) helps to offset increase in salaries and benefits per employee. Actions being taken (including benefits and PTO) to mitigate c
Slide 41: Expense Trend
41 Expense Trend Q4 07 ~2.8% CMS price increase; 3.7% employee merit increase Q2 08 ~2.8% CMS price roll back Q1 08 – Employee benefit enhancement and consolidation Some modifications made to benefit plans on November 15, 2008 with additional modifications on January 1, 2009
Slide 42: Strong Normalized Free Cash Flow
Strong Normalized Free Cash Flow 42 Free Cash Flow Year-to-Date (1) Reconciliation to GAAP provided on slide 61 and slide 63 (2) Includes capital expenditures for the refresh program
Slide 43: Sources and Uses of Cash
43 Sources and Uses of Cash Operating Cash Cash flow from operations Non-operating Cash Tax refunds Derivative proceeds Digital Hospital proceeds De novo’s Acquisitions/ Consolidations Debt Reduction Bed Expansions
Slide 44: Debt Reduction
Debt to EBITDA on September 30, 2008 = 5.5X ; Target = 4.5X 44 Debt Reduction (Millions) Significant debt reduction since 2004 $208 million paid down in first 10 months of 2008 (1)(2) No near-term refinancing requirements Future debt reduction from: Excess cash from operations Additional income tax
Slide 45: Debt Schedule
Debt to Adj. Consol. EBITDA on September 30, 2008 = 5.5X ; Target = 4.5X 45 Debt Schedule (1) Credit Agreement limits debt pay down on non–term loan balances to $50 million per year with the addition of a lifetime basket of $100 million. As of Sept. 30, 2008, the $50 million yearly limit had been re
Slide 46: The Value of Debt Pay Down
46 The Value of Debt Pay Down Lower Interest Expense = Higher EPS Debt = $50 million Interest Rate = 10.75% Federal Taxes = 0 Earnings Per Basic Share = $0.06 Net Debt Equity Debt pay down increases equity value Enterprise Value
Slide 47: De novo: 40-Bed Proforma Example
De novo’s attractive for future growth. We evaluate based on commitment (cash or leased). Leasing maximizes cash-on-cash returns in uncertain economy. 47 De novo: 40–Bed Proforma Example (1) Does not include estimated corporate overhead of ~4.75% of net operating revenues. (2) Assumes state income t
Slide 48: Interest Expense and Swap Settlements
As of September 30, 2008, we were in compliance with the covenants under our Credit Agreement. 48 Interest Expense and Swap Settlements (Millions) (1) We have the flexibility to peg 1,2,3 or 6 month Libor, or prime
Slide 49: Liquidity
49 Liquidity (Millions) (1) Letters of credit will be reduced by $33.6 million when we have court approval of the UBS settlement
Slide 50: Government, Class Action, and Related Settlements
50 As Settled Liability goes to “0” Shareholders equity (paid in capital) goes up Outstanding shares go up Cash effect “0” Expected Settlement Date 2009 Currently under Appeal Government, Class Action, and Related Settlements Today Under appeal Shares are not issued Change in fair value flows throug
Slide 51: Convertible Perpetual Preferred Stock
51 Convertible Perpetual Preferred Stock 400,000 shares 6.5% Series A preferred stock is convertible, at the option of the holder At initial conversion price of $30.50 per share If converted represents 13.1 million shares On or after July 20, 2011, we may cause conversion, if; Closing price of our c
Slide 52: Tax Position Update
52 Tax Position Update Cash Refunds $63 million on balance sheet at September 30, 2008 Relates to years 2003 or earlier $46 million received on October 1, 2008 (used for debt reduction) Remainder expected to be later in 2008 or early 2009 Future Cash Tax Payments Due to $2.5 billion in federal and s
Slide 53: Questions & Answers
53 Questions & Answers
Slide 54: Litigation Update
54 Litigation Update Topics Discussed : General Medicine UBS Settlement E & Y Arbitration Claims against Scrushy Questions and Answers John Whittington – Executive Vice President, General Counsel and Secretary
Slide 55: Concluding Remarks
55 Concluding Remarks
Slide 56: HealthSouth's Value Proposition
56 HealthSouth's Value Proposition Attractive industry Industry leader Strong operating cash flows Excellent growth opportunities ~ $2.5 billion NOL's
Slide 57: Appendix and Reconciliation
57 Appendix and Reconciliation
Slide 58: Outstanding Share Summary
58 Outstanding Share Summary
Slide 59: Q3 2008 Reconciliation of Net Income to Adjusted Income and EBITDA
59 Q3 2008 Reconciliation of Net Income to Adjusted Income from Continuing Operations and Adjusted Consolidated EBITDA (1)(3) – (Notes on following page)
Slide 60: Q3 2008 Reconciliation – Notes
60 Q3 2008 Reconciliation of Net Income to Adjusted Income from Continuing Operations and Adjusted Consolidated EBITDA – Notes
Slide 61: Nine Months 2008 Reconciliation of Net Income to Adjusted Income and EBITDA
61 9 Months 2008 Reconciliation of Net Income to Adjusted Income from Continuing Operations and Adjusted Consolidated EBITDA (1)(3) – (Notes on following page)
Slide 62: Nine Months 2008 Reconciliation – Notes
62 9 Months 2008 Reconciliation of Net Income to Adjusted Income from Continuing Operations and Adjusted Consolidated EBITDA – Notes
Slide 63: Nine Months 2008 Reconciliation of Adjusted EBITDA to Operating Cash Flow
63 9 Months 2008 Reconciliation of Adjusted Consolidated EBITDA (1) to Net Cash Provided by Operating Activities