Encompass Health Corporation · NYSE:EHC
Encompass Health — Q3 2017 Earnings Presentation
48 slides from Encompass Health's earnings presentation, Oct 27, 2017
Slide 1: Third Quarter 2017 Earnings Call
Third Quarter 2017 Earnings Call October 27, 2017 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 HealthSouth’s current outlook, views and plans with respect to future events, including legislative and regulatory developments, strate
Slide 3: Table of Contents
Table of Contents Q3 2017 Summary................................................................................................................................................. 4-5 Rebranding and Name Change Initiative ...............................................................................
Slide 4: Q3 2017 Summary
Q3 2017 Summary Q3 Growth (In Millions) Q3 2017 Q3 2016 Dollars Percent HealthSouth Consolidated Net operating revenues $ 995.6 $ 926.8 $ 68.8 7.4% Adjusted EBITDA $ 204.6 $ 198.4 $ 6.2 3.1% Inpatient Rehabilitation Segment Net operating revenues $ 794.8 $ 751.7 $ 43.1 5.7% Adjusted EBITDA $ 200.3 $
Slide 5: Q3 2017 Summary (cont.)
Q3 2017 Summary (cont.) u Expansion Activity (see page 23) Began operating a new 48-bed inpatient rehabilitation hospital with West Tennessee Healthcare in Jackson, TN Entered into an agreement with University Medical Center Health System to build a 40-bed inpatient rehabilitation hospital in Lu
Slide 6: Rebranding and Name Change
Rebranding and Name Change u Both business segments — inpatient rehabilitation and home health and hospice — will transition to the Encompass Health branding by the end of 2019. Rebranding and name change reinforce the Company’s existing strategy and position as an integrated provider of inpatient
Slide 7: IRF-Home Health Clinical Collaboration (All Payors)
IRF-Home Health Clinical Collaboration (All Payors) Overlap Markets* 28.7% Collaboration Rate u As of September 30, 2017, 60% of 26.8% HealthSouth’s IRFs were located within Collaboration Rate overlap markets.* 4,395 u The clinical collaboration rate with HealthSouth’s IRFs increased by 190 basis 3,
Slide 8: Inpatient Rehabilitation Segment - Revenue
Inpatient Rehabilitation Segment - Revenue Q3 Q3 Favorable/ ($millions) 2017 2016 (Unfavorable) Net operating revenues: Inpatient $ 768.6 $ 724.1 6.1% Outpatient and other 26.2 27.6 (5.1%) Total segment revenue $ 794.8 $ 751.7 5.7% (Actual Amounts) Discharges 42,948 41,368 3.8% Same-store discharge
Slide 9: Inpatient Rehabilitation Segment - Adjusted EBITDA
Inpatient Rehabilitation Segment - Adjusted EBITDA Q3 % of Q3 % of ($millions) 2017 Revenue 2016 Revenue Segment Adjusted Net operating revenues $ 794.8 $ 751.7 EBITDA for the quarter Less: Provision for doubtful accounts (11.3) 1.4% (13.7) 1.8% of $200.3 million Net operating revenues less provisio
Slide 10: Home Health and Hospice Segment - Revenue
Home Health and Hospice Segment - Revenue Q3 Q3 Favorable/ ($millions) 2017 2016 (Unfavorable) Net operating revenues: Home health revenue $ 181.2 $ 162.0 11.9 % Hospice revenue 19.6 13.1 49.6 % Total segment revenue $ 200.8 $ 175.1 14.7 % (Actual Amounts) Admissions 31,471 27,239 15.5 % Same-store
Slide 11: Home Health and Hospice Segment - Adjusted EBITDA
Home Health and Hospice Segment - Adjusted EBITDA Q3 Q3 % of % of ($millions) 2017 Revenue 2016 Revenue Net operating revenues $ 200.8 $ 175.1 Segment Adjusted Less: Provision for doubtful accounts (1.3) 0.6% (1.1) 0.6% EBITDA for the quarter Net operating revenues less provision for of $34.8 millio
Slide 12: Consolidated Adjusted EBITDA
Consolidated Adjusted EBITDA % of % of Q3 Consolidated Q3 Consolidated ($millions) 2017 Revenue 2016 Revenue Inpatient rehabilitation segment Adjusted EBITDA $ 200.3 $ 198.6 Consolidated Home health and hospice segment Adjusted EBITDA 34.8 25.8 Adjusted EBITDA General and administrative expenses* (3
Slide 13: Earnings per Share - As Reported
Earnings per Share - As Reported u EPS for the third quarter and first nine months of 2017 were impacted by: Q3 9 Months Lower interest expense due primarily to (In Millions, Except Per Share Data) 2017 2016 2017 2016 the redemptions of the 7.75% Senior Consolidated Adjusted EBITDA $ 204.6 $ 198.4
Slide 14: Adjusted Earnings per Share
Adjusted Earnings per Share(6) Q3 9 Months 2017 2016 2017 2016 Earnings per share, as reported $ 0.67 $ 0.64 $ 2.08 $ 1.90 Adjustments, net of tax: Professional fees — accounting, tax, and legal — — — 0.01 Mark-to-market adjustment for stock appreciation rights(7) (0.01) (0.01) 0.08 (0.01) Income ta
Slide 15: 2017 Adjusted Free Cash Flow
2017 Adjusted Free Cash Flow(8) $24.1 $9.4 $20.1 ($44.4) ($27.6) $394.5 $376.1 Adjusted Free Cash Adjusted Working Capital Cash Interest Cash Tax Maintenance Adjusted Free Cash Flow 9 Mos. 2016 (8) EBITDA and Other Expense Payments, Capital Expenditures Flow 9 Mos. 2017 Net of Refunds u Adjusted fre
Slide 16: Updated Guidance
Updated Guidance Previous Full-Year Updated 2017 Full-Year Guidance Guidance (Last Reiterated on August 15, 2017) (As of October 26, 2017) Net Operating Revenues Net Operating Revenues $3,875 million to $3,950 million $3,900 million to $3,950 million Adjusted EBITDA(9) Adjusted EBITDA(9) $805 millio
Slide 17: Guidance Considerations
Guidance Considerations Inpatient Rehabilitation Home Health and Hospice u Estimated 1.9% increase in Medicare pricing u Estimated 1.5% to 2.0%, or ~$2 million to for Q1 through Q3; ~0.8% for Q4 $4 million, net Medicare pricing reduction for Q4 2017 u Salary increase of ~3.0% u Q3 2016 included the
Slide 18: Adjusted Free Cash Flow and Tax Assumptions
Adjusted Free Cash Flow(8) and Tax Assumptions Free cash flow range for 2017 has been increased and narrowed. 9 Months u 2017 assumption for cash interest Certain Cash Flow Items 2017 2016 expense was narrowed from a range of 2017 (millions) Assumptions Actual $145 to $155 million to a range of $145
Slide 19: Free Cash Flow Priorities
Free Cash Flow Priorities (In Millions) 9 Months 2017 2017 2016 Highest Priority Actuals Assumptions Actuals IRF bed expansions $15.1 $30 to $40 $19.1 Growth New IRF’s in Core - De novos 58.8 85 to 105 72.6 Business - Acquisitions 10.9 TBD — - Replacement hospitals and other 4.4 10 to 20 11.1 New ho
Slide 20: Appendix
Appendix HEALTHSOUTH.
Slide 21: HealthSouth: A Leading Provider of Post-Acute Care
HealthSouth: A Leading Provider of Post-Acute Care ~60% of HealthSouth's IRFs are located within a 30-mile radius of an Encompass location. Encompass Inpatient Rehabilitation Home Health and Hospice Portfolio - As of September 30, 2017 Portfolio – As of September 30, 2017 IRF Market Share Inpatient
Slide 22: Pre-Payment Claims Denials - Inpatient Rehabilitation Segment
Pre-Payment Claims Denials - Inpatient Rehabilitation Segment Background HealthSouth reserves pre-payment claim denials via the provision for For several years, under programs designated as “widespread probes,” doubtful accounts upon notice from a MAC a claim is under review. certain Medicare Admi
Slide 23: Expansion Activity
Expansion Activity 7 Previously Announced 2 New States IRF Development Inpatient Rehabilitation Facilities Projects Underway # of New Beds 2017 2018 2019 De Novo: 1 Pearland, TX 40 — — 2 Shelby County, AL — 34 — Q3 2017 expansion activity highlights: 3 Hilton Head, SC — 38 — u Began operating a new
Slide 24: Business Outlook 2017 to 2019
Business Outlook 2017 to 2019* Business Model • Adjusted EBITDA CAGR: 5% - 9%** • Strong free cash flow generation 2017 2018 2019 • Quarterly cash dividends Shareholder • Opportunistic repurchases Distributions - (~$58 million authorization remaining as of September 30, 2017) Strategy Component Stro
Slide 25: Business Outlook 2017 to 2019: Revenue Assumptions
Business Outlook 2017 to 2019: Revenue Assumptions Inpatient Rehabilitation Home Health & Hospice Volume (Includes New Stores) • 3+% annual discharge growth • 10+% annual episode growth • 10% to15% annual episode Approx. 73% of Revenue growth Approx. 85% of Revenue Medicare Pricing FY 2017 FY 2018 F
Slide 26: Business Outlook 2017 to 2019: Labor and Other Expense Assumptions
Business Outlook 2017 to 2019: Labor and Other Expense Assumptions Inpatient Rehabilitation Home Health and Hospice Salaries and Benefits 2017 2018 2019 Salary increases 2.75-3.25% 2.75-3.25% 2.75-3.25% Benefit costs increases 5-10% 5-10% 5-10% Salaries Percent of Salaries & Benefits Salaries & Bene
Slide 27: Debt Maturity Profile - Face Value
Debt Maturity Profile - Face Value HealthSouth is positioned with a cost-efficient, flexible capital structure. As of September 30, 2017* Callable beginning September 2020 ($ in millions) Callable beginning November 2017 $527 Available $1,200 Callable beginning Senior March 2018 Notes 5.75% $138 Dra
Slide 28: Debt Schedule
Debt Schedule Change in September 30, Dec. 31, Debt vs. ($millions) 2017 2016 YE 2016 Advances under $700 million revolving credit facility, September 2022 - LIBOR +150bps $ 138.0 $ 152.0 $ (14.0) Term loan facility, September 2022 - LIBOR +150bps 298.3 421.2 (122.9) Bonds Payable: 5.125% Senior Not
Slide 29: New-Store/Same-Store IRF Growth
New-Store/Same-Store IRF Growth Altamonte Springs, FL (50 beds) Johnson City, TN (26 beds) Newnan, GA (50 beds) Reliant (857 beds) 25.0 Middletown, DE (34 beds) Franklin, TN (40 beds) Bryan, TX (49 beds) Broken Arrow, OK (22 beds) 20.0 Hot Springs, AR (27 beds) Gulfport, MS (33 beds) 15.0 Lexington,
Slide 30: Payment Sources (Percent of Revenues)
Payment Sources (Percent of Revenues) Inpatient Home Health Rehabilitation and Hospice Consolidated Segment Segment Q3 Q3 Q3 9 Months Full Year 2017 2016 2017 2016 2017 2016 2017 2016 2016 Medicare 73.3% 73.3% 85.2% 81.8% 75.7% 74.8% 75.3% 75.0% 75.2% Medicare Advantage 8.1% 7.6% 9.6% 8.8% 8.4% 7.9%
Slide 31: Inpatient Rehabilitation Operational and Labor Metrics
Inpatient Rehabilitation Operational and Labor Metrics Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2017 2017 2017 2016 2016 2016 2016 2016 (In Millions) Net patient revenue-inpatient $ 768.6 $ 762.9 $ 766.2 $ 740.9 $ 724.1 $ 721.2 $ 719.4 $ 2,905.5 Net patient revenue-outpatient and other revenues 26.2 27.1 26.3
Slide 32: Home Health and Hospice Operational Metrics
Home Health and Hospice Operational Metrics Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2017 2017 2017 2016 2016 2016 2016 2016 (In Millions) Net home health revenue $ 181.2 $ 172.9 $ 165.3 $ 165.2 $ 162.0 $ 157.1 $ 150.9 $ 635.2 Net hospice and other revenue 19.6 18.4 17.0 17.1 13.1 11.0 9.7 50.9 Net operating
Slide 33: Share Information
Share Information Weighted Average for the Period Q3 9 Months Full Year (Millions) 2017 2016 2017 2016 2016 2015 2014 Basic shares outstanding(20)(21) 97.8 89.1 92.3 89.3 89.1 89.4 86.8 Convertible perpetual preferred stock(20) — — — — — 1.0 3.2 Convertible senior subordinated notes(21) — 8.5 5.4 8.
Slide 34: Segment Operating Results
Segment Operating Results Q3 2017 Q3 2016 Home Home Health and HealthSouth Health and HealthSouth IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 794.8 $ 200.8 $ — $ 995.6 $ 751.7 $ 175.1 $ — $ 926.8 Less: Provision for doubtful accounts (11.3) (1.3) —
Slide 35: Segment Operating Results
Segment Operating Results Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016 Home Home Health and HLS Health and HLS Inpatient Hospice Reclasses Consolidated Inpatient Hospice Reclasses Consolidated Net operating revenues $ 2,377.3 $ 574.4 $ — $ 2,951.7 $ 2,253.5 $ 503.8 $ — $
Slide 36: Segment Operating Results
Segment Operating Results Year Ended December 31, 2016 Home Health HealthSouth IRF and Hospice Reclasses Consolidated Net operating revenues $ 3,021.1 $ 686.1 $ — $ 3,707.2 Less: Provision for doubtful accounts (57.0) (4.2) — (61.2) 2,964.1 681.9 — 3,646.0 Operating Expenses: Inpatient Rehabilitatio
Slide 37: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA(9) 2017 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 $ 84.4 $ 79.4 $ 85.1 $ 248.9 Loss (income) from disc ops, net of tax, attributable to HealthSouth 0.3 (0.2) 0.1 0.
Slide 38: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA(9) 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 H
Slide 39: Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA
Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q3 9 Months Full Year (In Millions) 2017 2016 2017 2016 2016 Net cash provided by operating activities $ 173.8 $ 177.6 $ 505.8 $ 499.4 $ 634.4 Provision for doubtful accounts (12.6) (14.8) (42.7) (46.7) (61.2) Professional fees
Slide 40: 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 Nine Months Ended Year Ended September 30, September 30, December 31, 2017 2016 2017 2016 2016 (In Millions) Total segment Adjusted EBITDA $ 235.1 $ 224.4 $ 705.6 $ 674.0 $ 899
Slide 41: 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(8) Q3 9 Months Full-Year (In Millions) 2017 2016 2017 2016 2016 Net cash provided by operating activities $ 173.8 $ 177.6 $ 505.8 $ 499.4 $ 634.4 Impact of discontinued operations 0.1 0.1 0.7 0.6 0.7 Net cash prov
Slide 42: Adjusted EPS - Q3 2017
Adjusted EPS(6) - Q3 2017 For the Three Months Ended September 30, 2017 Adjustments Mark-to- Market Adjustment for Stock Loss on Early As Appreciation Income Tax Extinguishment Reported Rights Adjustments(5) of Debt As Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 204.6 $ — $ —
Slide 43: Adjusted EPS - Q3 2016
Adjusted EPS(6) - Q3 2016 For the Three Months Ended September 30, 2016 Adjustments Mark-to- Market Adjustment for Stock Loss on Early As Appreciation Extinguishment As Reported Rights of Debt Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 198.4 $ — $ — $ 198.4 Depreciation and a
Slide 44: Adjusted EPS - YTD 2017
Adjusted EPS(6) - YTD 2017 For the Nine Months Ended September 30, 2017 Adjustments Mark-to- Market Adjustment for Stock Loss on Early As Appreciation Extinguishment Income Tax As Reported Rights of Debt Adjustments(5) Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 614.9 $ — $ —
Slide 45: Adjusted EPS - YTD 2016
Adjusted EPS(6) - YTD 2016 For the Nine Months Ended September 30, 2016 Adjustments Mark-to- Market Professional Adjustment Fees — for Stock Loss on Early As Accounting, Appreciation Extinguishment Sale of As Reported Tax, & Legal Rights of Debt Hospital Adjusted (In Millions, Except Per Share Amoun
Slide 46: End Notes
End Notes (1) Medicare provides that hospitals with residents in an approved graduate medical education program receive an additional payment for a Medicare discharge to reflect higher patient care costs of teaching hospitals relative to non-teaching hospitals. This additional payment is known as an
Slide 47: End Notes, con't.
End Notes, con’t. (8) 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 48: End Notes, con't.
End Notes, con’t. (15) Represents discharges from 125 consolidated hospitals in Q3 2017; 124 consolidated hospitals in Q2 2017; 122 consolidated hospitals in Q1 2017 and Q4 2016; 121 consolidated hospitals in Q3 2016; 120 consolidated hospitals in Q2 2016; and 121 consolidated hospitals in Q1 2016 (