Encompass Health Corporation · NYSE:EHC
Encompass Health — HealthSouth — Q4 2014 Earnings Presentation
41 slides from Encompass Health's earnings presentation, Feb 25, 2015
Slide 1: Fourth Quarter 2014 Earnings Call
Fourth Quarter 2014 Earnings Call February 25, 2015 Supplemental Slides
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, capita
Slide 3: Table of Contents
Table of Contents Q4 2014 Summary ........................................................................................................................................... 4-8 Development ..............................................................................................................
Slide 4: Q4 2014 Summary (Q4 2014 vs. Q4 2013)
Q4 2014 Summary (Q4 2014 vs. Q4 2013) ü Revenue growth of 7.2% ― Inpatient revenue growth of 8.1% (210 bps attributable to Fairlawn(1); 150 bps attributable to RAC reserves in Q4 2013(2)) ▪ Discharge growth of 4.7% • Same-store discharge growth of 2.2% (negatively impacted by 30 bps for closure of 4
Slide 5: Q4 2014 Summary (cont.)
Q4 2014 Summary (Q4 2014 vs. Q4 2013) (cont.) ü Salaries and benefits as a percent of revenue increased 150 bps mainly attributable to: ― Approx. $3 million lower reduction to self-insurance reserves for group medical and workers' compensation in Q4 2014 versus Q4 2013 ― Start-up costs for four new
Slide 6: Q4 2014 Summary (cont.)
Q4 2014 Summary (Q4 2014 vs. Q4 2013) (cont.) ü Adjusted EBITDA* for the quarter of $140.8 million decreased by 1.1%: ― Negatively impacted by approx. $6 million for net start-up costs at hospitals opening in Q4 2014 ― Positively impacted by approx. $2 million related to the increase in ownership an
Slide 7: Q4 2014 Summary (cont.)
Q4 2014 Summary (cont.) ü Adjusted free cash flow* for the quarter of $45.4 million: ― Negatively impacted by growth in accounts receivable due to additional claims denials predominantly by one Medicare Administrative Contractor and continued delays at the administrative law judge hearing level ― Po
Slide 8: Q4 2014 Summary (cont.)
Q4 2014 Summary (cont.) ü Acquired Encompass Home Health and Hospice (closed December 31, 2014) — $750 million purchase price; $695.5 million in cash and $64.5 million in Encompass management equity roll — Transaction funded via credit facility • In January 2015, the Company issued $400 million of a
Slide 9: Development
Development ü Opened four new hospitals (three de novos; one acquisition): ― Altamonte Springs, FL (50 beds); opened October 2014 ― Johnson City, TN (26 beds); acquired Quillen Rehabilitation Hospital November 2014 ― Newnan, GA (50 beds); opened December 2014 ― Middletown, DE (34 beds); opened Decem
Slide 10: Revenues (Q4 2014 vs. Q4 2013)
Revenues (Q4 2014 vs. Q4 2013) Q4 Q4 Increase/ (Millions) 2014 2013 (Decrease) Inpatient $ 580.9 $ 537.5 8.1% Outpatient and other 32.5 34.6 (6.1%) Consolidated net operating $ 613.4 $ 572.1 7.2% (Actual Amounts) Discharges 34,465 32,906 4.7% Net patient revenue / discharge $ 16,855 $ 16,334 3.2% ü
Slide 11: Expenses (Q4 2014 vs. Q4 2013)
Expenses (Q4 2014 vs. Q4 2013) Q4 Q4 Increase/ (Millions) 2014 2013 (Decrease) Salaries and benefits $ 300.3 $ 272.0 10.4% Percent of net operating revenues 49.0% 47.5% 150 bps EPOB (employees per occupied bed) 3.52 3.48 1.1% (3) Hospital-related expenses $ 130.8 $ 118.4 10.5% (other operating, supp
Slide 12: Adjusted EBITDA
Adjusted EBITDA* Full-Year Q4 Full-Year Q4 2014 2014 (Millions) 2014 2013 2014 2013 Net operating revenues $ 613.4 $ 572.1 $ 2,405.9 $ 2,273.2 ($1.5) +26.0 M Less: Provision for doubtful accounts (6.6) (3.6) (31.6) (26.0) (1.1%) +4.7% Net operating revenues less provision for doubtful accounts 606.8
Slide 13: Earnings per Share
Earnings per Share Q4 2014 reflects: Q4 Full-Year ü Diluted earnings(5) per (In Millions, Except Per Share Data) 2014 2013 2014 2013 share of $0.41 negatively Adjusted EBITDA $ 140.8 $ 142.3 $ 577.6 $ 551.6 impacted by: Interest expense and amortization of debt discounts and fees (25.7) (26.5) (109.
Slide 14: Adjusted Free Cash Flow
Adjusted Free Cash Flow(12) Q4 Full-Year (Millions) 2014 2013 2014 2013 Net cash provided by operating activities $ 70.2 $ 100.9 $ 444.9 $ 470.3 Impact of discontinued operations 0.2 0.5 1.2 1.9 Net cash provided by operating activities of continuing operations 70.4 101.4 446.1 472.2 Capital expendi
Slide 15: Adjusted Free Cash Flow
Adjusted Free Cash Flow* 12 Months Change (Millions) 2014 2013 $ % Adjusted free cash flow(12) $311.3 $330.9 (19.6) (5.9)% Operating Cash Flows Investing and Financing Cash Flows Operating Cash Flows Investing and Financing Cash Flows $26.0 $16.7 ($1.1) ($8.7) ($35.3) ($17.2) $330.9 $311.3 Adjusted
Slide 16: 2015 Guidance - Adjusted EBITDA
2015 Guidance - Adjusted EBITDA* Adjusted EBITDA $670 million to $680 million ü Inpatient rehabilitation segment considerations for 2015: ― Revenue growth between 5.9% and 7.3% ― Discharge growth between 3.5% and 4.5% ― Revenue per discharge growth between 2.3% and 2.6% ― Bad debt expense of approx.
Slide 17: 2015 Guidance - EPS
2015 Guidance - EPS Earnings per Share from Continuing EPS Guidance Operations Attributable to HealthSouth(5) (In Millions, Except Per Share Data) Actual 2014 Low 2015 High $ 2.24 to $ 2.29 Adjusted EBITDA $ 577.6 $ 670 $ 680 Interest expense and amortization of debt discounts and fees (109.2) (129)
Slide 18: Adjusted Free Cash Flow and Tax Assumptions
Adjusted Free Cash Flow* and Tax Assumptions Certain Cash Flow Items(12) 2015 2014 2013 (millions) Assumptions Actual Actual • Cash interest expense(15) $110 to $115 $96.5 $95.4 • Cash payments for taxes, net of $15 to $20 $16.4 $7.7 refunds • Working Capital and Other(16) $40 to $50 $55.0 $19.6 • M
Slide 19: Priorities for Reinvesting Free Cash Flow
Priorities for Reinvesting Free Cash Flow « 2015 2014 2013 Assumptions Actuals Actuals Highest Priority IRF bed expansions $30 to $40 $23.6 $24.9 Growth Remains New IRF's in Core - De novos 40 to 60 53.7 26.6 Business - Acquisitions TBD 20.2 28.9 New home health and hospice acquisitions 30 to 40 674
Slide 20: Appendix
Appendix HEALTHSOUTH.
Slide 21: Business Outlook: 2015 to 2017
Business Outlook: 2015 to 2017(21) Business Model : • Adjusted EBITDA* CAGR: 5% - 9% (2014 base-year Adjusted EBITDA includes an estimate for Encompass)(22) • Continued strong free cash flow generation 2015 2016 2017 • Quarterly cash dividends Shareholder • Opportunistic repurchases Distributions ($
Slide 22: Business Outlook: Revenue Assumptions
Business Outlook: Revenue Assumptions Inpatient Rehabilitation Home Health & Hospice • 2.5% to 3.5% annual discharge • 10% to 15% annual episode Volume growth (excludes acquisitions) growth • Includes bed expansions, de • Includes $35-$40 million per novos and unit consolidations annum in agency acq
Slide 23: Business Outlook: Labor and Other Expense Assumptions
Business Outlook: Labor and Other Expense Assumptions Inpatient Rehabilitation Home Health and Hospice Salaries and Benefits 2015 2016 2017 Merit increases 2.25-2.75% 2.5-3.0% 2.5-3.0% Benefit costs 5-8% 5-8% 5-8% Salaries Percent of Salaries & Benefits Salaries ~ 88% Salaries & & Benefits Benefits
Slide 24: Our New-Store/Same-Store IRF Growth
Our New-Store/Same-Store IRF Growth HealthSouth's IRF volume growth is driven by bed expansions and new IRFs. Altamonte Springs, FL (50 beds) 10.0 Johnson City, TN (26 beds) Cypress, TX (40 beds) Ocala, FL Augusta, GA (58 beds) Newnan, GA (50 beds) Cincinnati, OH (40 beds) (40 beds) Littleton, CO (4
Slide 25: Debt Schedule
Debt Schedule Pro Forma Credit Rating Pro Forma Post Change in S&P Moody Issuance and Dec. 31, Dec. 31, Debt vs. (28) (28) (Millions) Corporate BB- Ba3 Term Loan Paydown 2014 2013 YE 2013 Advances under $600 million revolving credit facility, September 2019 - LIBOR +175bps(28) BB+ Baa3 $ 175.0 $ 325
Slide 26: Debt Maturity Profile - Face Value
Debt Maturity Profile - Face Value HealthSouth is positioned with a cost-efficient, flexible capital structure. Proforma Dec. 31, 2014 for Issuance and Credit Facility Repayments(28)(29) In January 2015, the Company ($ in millions) issued $400 million of additional Callable beginning 5.75% senior no
Slide 27: Revenues & Expenses (Sequential)
Revenues & Expenses (Sequential) Q4 Q3 Increase/ Revenues (millions) 2014 2014 (Decrease) Inpatient $ 580.9 $ 563.7 3.1% Outpatient and other 32.5 33.2 (2.1%) Consolidated net operating $ 613.4 $ 596.9 2.8% (Actual Amounts) Discharges 34,465 33,541 2.8% Net patient revenue / discharge $ 16,855 $ 16,
Slide 28: Revenues & Expenses (Full Year)
Revenues & Expenses (Full Year) 12-Months 12-Months Increase/ Revenues (millions) 2014 2013 (Decrease Inpatient $ 2,272.5 $ 2,130.8 6.7% Outpatient and other 133.4 142.4 (6.3%) Consolidated net operating $ 2,405.9 $ 2,273.2 5.8% (Actual Amounts) Discharges 134,515 129,988 3.5% Net patient revenue /
Slide 29: Payment Sources (Percent of Revenues)
Payment Sources (Percent of Revenues) Q4 Full-Year 2014 2013 2014 2013 Medicare 73.9% 74.7% 74.1% 74.5% Medicaid 2.0% 1.2% 1.8% 1.2% Workers' compensation 1.1% 1.2% 1.2% 1.2% Managed care and other discount plans, including Medicare Advantage(31) 18.8% 18.3% 18.6% 18.5% Other third-party payors 1.9%
Slide 30: Operational and Labor Metrics
Operational and Labor Metrics Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full-Year 2014 2014 2014 2014 2013 2013 2013 2013 2014 2013 (In Millions) Net patient revenue- inpatient $ 580.9 $ 563.7 $ 569.7 $ 558.2 $ 537.5 $ 528.8 $ 527.4 $ 537.1 $ 2,272.5 $ 2,130.8 Net patient revenue- outpatient and other revenues 32.5 3
Slide 31: Impact of Fairlawn Rehabilitation Hospital Consolidation
Operational and Labor Metrics Impact of Fairlawn Rehabilitation Hospital Consolidation(1) Fairlawn Fairlawn Fairlawn Fairlawn Rehabilitation Rehabilitation Rehabilitation Rehabilitation Hospital Hospital as Hospital Hospital as as Consolidated Equity Method as Consolidated Equity Method Entity Entit
Slide 32: Encompass Operational Metrics
Encompass Operational Metrics Revenue Payor Mix(40) Medicaid: 7% ($million) $369 Medicare Advantage, $302 commercial, and other: 10% Medicare: 83% 2013 2014 Home Health Home Health Hospice Admissions Total Episodes Daily Census 49,032 98,461 387 39,350 80,594 268 Visits per Episode 20.5 19.9 2013 20
Slide 33: Outstanding Share Summary, Warrant Information, and Conversion Price
Outstanding Share Summary, Warrant Information, and Conversion Price Weighted Average for the Period Q4 Full-Year (Millions) 2014 2013 2014 2013 2012 Basic shares outstanding(35)(36)(37) 86.6 86.4 86.8 88.1 94.6 Diluted shares outstanding(35)(36)(37)(10) 100.8 100.8 100.7 102.1 108.1 End of Period Q
Slide 34: Adjusted EBITDA History
Adjusted EBITDA History* Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full-Year (Millions) 2014 2014 2014 2014 2013 2013 2013 2013 2014 2013 Net operating revenues $ 613.4 $ 596.9 $ 604.4 $ 591.2 $ 572.1 $ 564.0 $ 564.5 $ 572.6 $ 2,405.9 $ 2,273.2 Less: Provision for doubtful accounts (6.6) (8.2) (9.3) (7.5) (3.6) (8.0)
Slide 35: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA(38) 2014 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 $ 61.5 $ 97.9 $ 64.8 $ 57.5 $ 281.7 Loss (income) from disc ops, net of tax, attributable to
Slide 36: Reconciliation of Net Income to Adjusted EBITDA - Impact of Consolidation of Fairlawn
Reconciliation of Net Income to Adjusted EBITDA(38)- Impact of Consolidation of Fairlawn Rehabilitation Hospital(1) Fairlawn Fairlawn Fairlawn Rehabilitation Rehabilitation Fairlawn Rehabilitation Hospital Hospital Rehabilitation Hospital Hospital as Consolidated as Equity Method as Consolidated as
Slide 37: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA(38) 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 38: Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA
Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q4 Full-Year (Millions) 2014 2013 2014 2013 Net cash provided by operating activities $ 70.2 $ 100.9 $ 444.9 $ 470.3 Provision for doubtful accounts (6.6) (3.6) (31.6) (26.0) Professional fees—accounting, tax, and legal 1.7 1.7
Slide 39: End Notes
End Notes (1) HealthSouth acquired an additional 30% equity interest in Fairlawn Rehabilitation Hospital in Worcester, MA from its joint venture partner. This transaction increased HealthSouth's ownership interest from 50% to 80% and resulted in a change in accounting for this hospital from the equi
Slide 40: End Notes, con't.
End Notes, con't. (11) The interest and amortization related to the convertible senior subordinated notes must be added to income from continuing operations when calculating diluted earnings per share. (12) Definition of adjusted free cash flow is net cash provided by operating activities of continu
Slide 41: End Notes, con't.
End Notes, con't. (28) In September 2014, the Company issued an additional $175 million of its 5.75% senior notes due 2024. In September and December 2014, the Company amended its credit agreement to, among other things, add $450 million of term loan facility capacity and extend the revolver maturit