Encompass Health Corporation · NYSE:EHC
Encompass Health — Q2 2019 Earnings Presentation
49 slides from Encompass Health's earnings presentation, Jul 30, 2019
Slide 1: Second Quarter 2019 Earnings Call
Second Quarter 2019 Earnings Call July 30, 2019 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 Q2 2019 summary.................................................................................................... 4-5 Clinical collaboration rate ......................................................................................... 6 Inpatient rehabilitation segment .........
Slide 4: Q2 2019 summary
Q2 2019 summary Q2 Growth ($millions) Q2 2019 Q2 2018 Dollars Percent Encompass Health Consolidated Net operating revenues $ 1,135.0 $ 1,067.7 $ 67.3 6.3% Adjusted EBITDA $ 252.2 $ 231.6 $ 20.6 8.9% Inpatient Rehabilitation Segment Net operating revenues $ 873.9 $ 834.6 $ 39.3 4.7% Adjusted EBITDA $
Slide 5: Q2 2019 summary (cont.)
Q2 2019 summary (cont.) u Expansion activity (see page 23) Began operating a new 40-bed inpatient rehabilitation hospital in Lubbock, Texas in May 2019, a joint venture with University Medical Center Health System Added 81 beds to existing hospitals Opened new home health location in South Car
Slide 6: Improving patient experience and outcomes through integrated care delivery
The Company continues to improve the patient experience and outcomes through integrated care delivery. Inpatient rehabilitation–home health clinical collaboration (all payors) overlap markets* 34.9% 33.2% Collaboration rate Collaboration rate u As of June 30, 2019, Encompass Health had 83 overlap ma
Slide 7: Inpatient rehabilitation segment - revenue
Inpatient rehabilitation segment - revenue Q2 Q2 Favorable/ ($millions) 2019 2018 (Unfavorable) Net operating revenues: Inpatient $ 851.8 $ 809.6 5.2% Outpatient and other 22.1 25.0 (11.6%) Total segment revenue $ 873.9 $ 834.6 4.7% (Actual Amounts) Discharges 46,679 45,010 3.7% Same-store discharge
Slide 8: Inpatient rehabilitation segment - Adjusted EBITDA
Inpatient rehabilitation segment - Adjusted EBITDA u Segment Adjusted EBITDA for the quarter of $233.9 million. • All expense ratios were Q2 Q2 negatively impacted by an % of % of increase in revenue reserves ($millions) 2019 Revenue 2018 Revenue related to bad debt (see page 7) Net operating revenu
Slide 9: Home health and hospice segment - revenue
Home health and hospice segment - revenue Q2 Q2 Favorable/ ($millions) 2019 2018 (Unfavorable) Net operating revenues: Home health revenue $ 222.7 $ 204.8 8.7 % Hospice revenue 38.4 28.3 35.7 % Total segment revenue $ 261.1 $ 233.1 12.0 % Home Health Metrics (Actual Amounts) Admissions 37,828 34,026
Slide 10: Home health and hospice segment - Adjusted EBITDA
Home health and hospice segment - Adjusted EBITDA u Segment Adjusted EBITDA for the quarter of $49.1 Q2 Q2 million. % of % of ($millions) 2019 Revenue 2018 Revenue Included the acquisition of Net operating revenues $ 261.1 $ 233.1 Camellia Healthcare which closed on May 1, 2018 Cost of services (1
Slide 11: Consolidated Adjusted EBITDA
Consolidated Adjusted EBITDA Consolidated Adjusted EBITDA for the quarter of $252.2 million u General and administrative expenses decreased as a percent of consolidated revenue primarily due to expenses associated with the Company’s rebranding and name change in 2018 and operating leverage resulting
Slide 12: Earnings per share - as reported
Earnings per share - as reported u Reported earnings per diluted share for both periods in 2019 compared to the Q2 6 Months same periods of 2018 reflect an increase (In Millions, Except Per Share Data) 2019 2018 2019 2018 in Adjusted EBITDA and a lower effective Consolidated Adjusted EBITDA $ 252.2
Slide 13: Adjusted earnings per share
Adjusted earnings per share(4) Q2 6 Months 2019 2018 2019 2018 Earnings per share, as reported $ 0.92 $ 0.92 $ 1.95 $ 1.76 Adjustments, net of tax: Mark-to-market adjustment for stock appreciation rights (see page 19) 0.21 0.07 0.28 0.15 Transaction costs — — 0.01 0.01 Income tax adjustments (0.07)
Slide 14: 2019 Adjusted free cash flow
2019 Adjusted free cash flow(5) $40.2 $18.8 $8.0 ($76.8) ($1.6) $281.4 $270.0 Adjusted free cash Adjusted Working capital Cash interest Cash tax Maintenance Adjusted free cash flow 6 Mos. 2018 EBITDA and other payments payments, capital expenditures flow 6 Mos. 2019 net of refunds u Adjusted free ca
Slide 15: Guidance - updated as of July 29, 2019
Guidance - updated as of July 29, 2019 Previous 2019 Full-Year Updated 2019 Full-Year Guidance Guidance Net operating revenues Net operating revenues $4,500 million to $4,600 million $4,500 million to $4,600 million Adjusted EBITDA(6) Adjusted EBITDA(6) $925 million to $945 million $940 million to $
Slide 16: 2019 Guidance considerations
2019 Guidance considerations Inpatient rehabilitation Home health and hospice u Estimated 1.2% increase in Medicare pricing u Estimated 1.5% net Medicare pricing increase before before reserves related to bad debt for Q3; reserves related to bad debt for second half of 2019 estimated 0% to (0.25)% r
Slide 17: Adjusted free cash flow assumptions
Adjusted free cash flow(5) assumptions 6 Months 6 Months Certain cash flow items 2018 2019 u Increased 2019 2018 2019 (millions) Actual Assumptions assumption for cash Actual Actual interest payments due to funding of the acquisition of Cash interest payments (net Alacare (see of amortization of deb
Slide 18: Uses of free cash flow
Uses of free cash flow 6 Months 2019 2019 2018 Actuals Assumptions Actuals IRF bed expansions $21.0 $40 to $50 $22.3 New IRFs - De novos 48.3 85 to 115 76.4 - Acquisitions — opportunistic — - Replacement IRFs and other 37.0 90 to 110 24.5 Growth in core Home health and hospice acquisitions business
Slide 19: Overview of rollover shares and SARs held by home health and hospice management
Overview of rollover shares and SARs 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-acquis
Slide 20: Appendix
Appendix
Slide 21: Encompass Health portfolio and market overlap
Encompass Health aand leading provider of inpatient rehabilitation home-based care Market overlap 83 of EHC’s IRFs have an EHC home health location within the service area.* Portfolio as of June 30, 2019 Inpatient rehabilitation hospitals (“IRFs”) Home health locations Hospice locations 5 Future IRF
Slide 22: Rebranding and name change
Rebranding and name change The Company’s rebranding and name change reinforce its existing strategy and position as an integrated provider of inpatient and home-based care. JULY 2017 APRIL 2018 OCT. 2018 Announced Phase 1 field asset Phase 3 field asset planned conversions conversions name change JA
Slide 23: Expansion activity
Expansion activity Inpatient Rehabilitation Facilities - As of June 30, 2019 Previously announced IRF # of New Beds 5 development projects 2019 2020 2021 underway as of June 30, 2019 De novo: 3 New states 1 Murrieta, CA 50 — — 2 Katy, TX 40 3 Sioux Falls, SD — 40 — Q2 2019 expansion activity highlig
Slide 24: Pre-payment claims denials - inpatient rehabilitation segment
Pre-payment claims denials - inpatient rehabilitation segment Background Encompass Health reserves pre-payment claim denials as a reduction of • For several years prior to 2018, under programs designated as net operating revenues upon notice from a MAC a claim is under review. “widespread probes,” c
Slide 25: Business outlook: 2019 to 2021
Business outlook: 2019 to 2021 2019 2020 2021 • Enhance clinical collaboration between the Company’s IRFs and home health locations Key • Build stroke market share (https://ehc.news/LifeAfterStroke) operational • Develop and implement post-acute solutions initiatives • Implement changes to reimburse
Slide 26: Business outlook 2019 to 2021: revenue assumptions
Business outlook 2019 to 2021: revenue assumptions Volume Inpatient Rehabilitation* Home Health* (includes new stores) 3+% annual discharge growth 10+% annual admission growth Approx. 73% of segment revenue Approx. 85% of segment revenue Medicare Pricing FY 2019 FY 2020 FY 2021 CY 2019 CY 2020 CY 20
Slide 27: Business outlook 2019 to 2021: labor and other expense assumptions
Business outlook 2019 to 2021: labor and other expense assumptions Inpatient Rehabilitation Home Health and Hospice Salaries and Benefits 2019 2020 2021 Salary increases 2.75-3.25% 2.75-3.25% 2.85-3.35% Benefit costs increases 6-8% 5-10% 5-10% Segment Operating Expenses Salaries Salaries and benefit
Slide 28: Debt schedule
Debt schedule Change in June 30, December 31, Debt vs. ($millions) 2019 2018 YE 2018 Advances under $700 million revolving credit facility, September 2022 - LIBOR +150bps $ 335.0 $ 30.0 $ 305.0 Term loan facility, September 2022 - LIBOR +150bps 272.8 280.1 (7.3) Bonds Payable: 5.125% Senior Notes du
Slide 29: Debt maturity profile - face value
Debt maturity profile - face value As of June 30, 2019* Callable beginning September 2020 ($ in millions) Callable beginning November 2017(3) $326 Available $1,100 Callable beginning Senior March 2018 Notes Revolver 5.75% $335 Drawn capacity + $39 reserved for $300 Senior $350 Senior LC’s $273 Revol
Slide 30: New-store/same-store growth Inpatient Rehabilitation
New-store/same-store growth Inpatient Rehabilitation 25.0 Shelby County, AL (34 beds) 20.0 Bryan, TX (49 beds) Bluffton, SC (38 beds) Broken Arrow, OK (22 beds) 15.0 Pearland, TX Murrells Inlet, Lubbock, TX Gulfport, MS (33 beds) (40 beds) SC (29 beds) (40 beds) Westerville, OH (60 beds) 10.0 Jackso
Slide 31: New-store/same-store growth Home Health
New-store/same-store growth Home Health Acquired CareSouth 60.0 (44 home health locations in 7 states) in November 2015 50.0 40.0 30.0 Acquired Camellia Healthcare (14 home health locations in 3 states) in May 2018 20.0 10.0 0.0 Admissions Q32016 Q3 2016 Q42016 Q4 2016 Q1 2017 Q1 2017 Q2 2017 Q2 201
Slide 32: Payment sources (percent of revenues)
Payment sources (percent of revenues) Inpatient Home Health Rehabilitation and Hospice Consolidated Segment Segment Q2 Q2 Q2 6 Months Full Year 2019 2018 2019 2018 2019 2018 2019 2018 2018 Medicare 72.1% 72.8% 84.7% 85.5% 74.9% 75.5% 75.4% 76.1% 75.9% Medicare Advantage 11.1% 9.4% 10.2% 9.3% 10.9% 9
Slide 33: Inpatient rehabilitation operational and labor metrics
Inpatient rehabilitation operational and labor metrics Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2019 2019 2018 2018 2018 2018 2018 (In Millions) Net patient revenue-inpatient $ 851.8 $ 847.6 $ 822.8 $ 798.4 $ 809.6 $ 817.1 $ 3,247.9 Net patient revenue-outpatient and other revenues 22.1 22.5 22.9 27.2 25.0 23.2
Slide 34: Home health and hospice operational metrics
Home health and hospice operational metrics Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2019 2019 2018 2018 2018 2018 2018 (In Millions) Net home health revenue $ 222.7 $ 219.5 $ 215.3 $ 209.2 $ 204.8 $ 185.3 $ 814.6 Net hospice revenue 38.4 34.4 35.0 32.8 28.3 20.4 116.5 Net operating revenues $ 261.1 $ 253.9 $ 25
Slide 35: Share information
Share information Weighted Average for the Period Q2 6 Months Full Year 2019 2018 2019 2018 2018 2017 2016 Basic shares outstanding(16) 98.0 97.9 98.2 97.9 97.9 93.7 89.1 Convertible senior subordinated notes(16) — — — — — 4.0 8.5 Restricted stock awards, dilutive stock options, restricted stock uni
Slide 36: Segment operating results
Segment operating results Q2 2019 Q2 2018 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 873.9 $ 261.1 $ — $ 1,135.0 $ 834.6 $ 233.1 $ — $ 1,067.7 Operating Expenses: Inpatient Rehabilitation: Salaries and
Slide 37: Segment operating results
Segment operating results Six Months Ended June 30, 2019 Six Months Ended June 30, 2018 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 1,744.0 $ 515.0 $ — $ 2,259.0 $ 1,674.9 $ 438.8 $ — $ 2,113.7 Operating
Slide 38: Segment operating results
Segment operating results Year Ended December 31, 2018 Home Health and (In Millions) IRF Hospice Reclasses Consolidated Net operating revenues $ 3,346.2 $ 931.1 $ — $ 4,277.3 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (1,701.5) — (652.5) (2,354.0) Other operating expenses(a)
Slide 39: Reconciliation of net income to Adjusted EBITDA
Reconciliation of net income to Adjusted EBITDA(6) 2019 Q1 Q2 6 Months Per Per Per (in millions, except per share data) Total Share Total Share Total Share Net Income $ 125.2 $ 110.9 $ 236.1 Loss from disc ops, net of tax, attributable to Encompass Health 0.5 0.1 0.6 Net income attributable to nonco
Slide 40: Reconciliation of net income to Adjusted EBITDA
Reconciliation of net income to Adjusted EBITDA(6) 2018 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 $ 105.2 $ 113.2 $ 109.3 $ 47.7 $ 375.4 Loss (income) from disc ops, net of tax, attributable t
Slide 41: Net cash provided by operating activities reconciled to Adjusted EBITDA
Net cash provided by operating activities reconciled to Adjusted EBITDA(6) Q2 6 Months Full Year (In Millions) 2019 2018 2019 2018 2018 Net cash provided by operating activities $ 145.4 $ 169.2 $ 305.3 $ 385.5 $ 762.4 Interest expense and amortization of debt discounts and fees 37.7 37.7 74.9 73.3 1
Slide 42: 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 Six Months Ended Year Ended June 30, June 30, December 31, 2019 2018 2019 2018 2018 (In Millions) Total segment Adjusted EBITDA $ 283.0 $ 265.1 $ 559.3 $ 522.4 $ 1,034.3 Genera
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(5) Q2 6 Months Full Year (In Millions) 2019 2018 2019 2018 2018 Net cash provided by operating activities $ 145.4 $ 169.2 $ 305.3 $ 385.5 $ 762.4 Impact of discontinued operations 1.5 (0.1) 4.5 0.6 (0.8) Net cash
Slide 44: Adjusted EPS - Q2 2019
Adjusted EPS(4) - Q2 2019 For the Three Months Ended June 30, 2019 Adjustments Mark-to- Market Change in Adjustment Loss on Fair Market for Stock Early Value of As Comp. Exting. Income Tax Transaction Equity As Reported Expense of Debt Adjustments Costs Securities Adjusted (In Millions, Except Per S
Slide 45: Adjusted EPS - Q2 2018
Adjusted EPS(4) - Q2 2018 For the Three Months Ended June 30, 2018 Adjustments Mark-to- Market Change in Adjustment Fair Market on Stock Value of As Compensation Income Tax Equity As Reported Expense Adjustments Securities Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 231.6 $ —
Slide 46: Adjusted EPS - YTD 2019
Adjusted EPS(4) - YTD 2019 For the Six Months Ended June 30, 2019 Adjustments Mark-to- Market Change in Adjustment Loss on Fair Market Payroll for Stock Early Value of Taxes on As Comp. Exting. Income Tax Transaction Equity SARs As Reported Expense of Debt Adjustments Costs Securities exercise Adjus
Slide 47: Adjusted EPS - YTD 2018
Adjusted EPS(4) - YTD 2018 For the Six Months Ended June 30, 2018 Adjustments Mark-to- Market Change in Adjustment Fair Market on Stock Value of As Compensation Income Tax Transaction Equity As Reported Expense Adjustments costs Securities Adjusted (In Millions, Except Per Share Amounts) Adjusted EB
Slide 48: End notes
End notes (1) As previously disclosed, since 2013, the Company had been cooperating with an investigation of alleged improper or fraudulent Medicare and Medicaid claims. The investigation, under the direction of DOJ, had been pending seven years. The Company is aware of no evidence of fraud, falsity
Slide 49: End notes, con't.
End notes, con’t. (8) On April 17, 2019, the Centers for Medicare and Medicaid Services (“CMS”) released its notice of proposed rule making for fiscal year 2020 under the inpatient rehabilitation facility prospective payment system (the “2020 Proposed IRF Rule”). Based on its analysis of the adjustm