Encompass Health Corporation · NYSE:EHC
Encompass Health — Q4 2019 Earnings Presentation
50 slides from Encompass Health's earnings presentation, Feb 7, 2020
Slide 1: Fourth Quarter 2019 Earnings Call
Fourth Quarter 2019 Earnings Call February 7, 2020 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 Q4 2019 summary.................................................................................................... 4-5 Clinical collaboration ............................................................................................... 6 Inpatient rehabilitation segment ........
Slide 4: Q4 2019 summary
Q4 2019 summary Q4 Full Year ($millions) 2019 2018 Growth 2019 2018 Growth Encompass Health Consolidated Net operating revenues $ 1,184.4 $ 1,096.0 8.1% $ 4,605.0 $ 4,277.3 7.7% Adjusted EBITDA $ 238.2 $ 221.8 7.4% $ 964.9 $ 901.0 7.1% Inpatient Rehabilitation Segment Net operating revenues $ 896.7
Slide 5: Q4 2019 summary (cont.)
Q4 2019 summary (cont.) u Expansion activity (see page 23) Announced plans to build a new 40-bed inpatient rehabilitation hospital in Toledo, Ohio; expected to be operational in late 2020 Added 40 beds to existing hospitals, bringing full-year 2019 bed additions to 152 beds Opened one new home
Slide 6: Inpatient rehabilitation–home health clinical collaboration
The Company continues to improve the patient experience and outcomes through integrated care delivery. Inpatient rehabilitation–home health clinical collaboration As of December 31, 2019, (all payors) overlap markets* Encompass Health had 89 overlap markets.* e 35.6% Clinical collaboration objective
Slide 7: Inpatient rehabilitation segment - revenue
Inpatient rehabilitation segment - revenue Q4 Q4 Favorable/ ($millions) 2019 2018 (Unfavorable) Net operating revenues: Inpatient $ 873.5 $ 822.8 6.2% Outpatient and other 23.2 22.9 1.3% Total segment revenue $ 896.7 $ 845.7 6.0% (Actual Amounts) Discharges 47,885 45,498 5.2% Same-store discharge gr
Slide 8: Inpatient rehabilitation segment - Adjusted EBITDA
Inpatient rehabilitation segment - Adjusted EBITDA u All expense ratios were negatively impacted in Q4 Q4 Q4 % of % of 2019 by an increase in revenue ($millions) 2019 Revenue 2018 Revenue reserves related to bad debt Net operating revenues $ 896.7 $ 845.7 (see page 24). Operating expenses: u Expense
Slide 9: Home health and hospice segment - revenue
Home health and hospice segment - revenue Q4 Q4 Favorable/ ($millions) 2019 2018 (Unfavorable) Net operating revenues: Home health revenue $ 236.9 $ 215.3 10.0 % Hospice revenue 50.8 35.0 45.1 % Total segment revenue $ 287.7 $ 250.3 14.9 % Home Health Metrics (Actual Amounts) Admissions 41,781 35,15
Slide 10: Home health and hospice segment - Adjusted EBITDA
Home health and hospice segment - Adjusted EBITDA Q4 Q4 % of % of ($millions) 2019 Revenue 2018 Revenue Net operating revenues $ 287.7 $ 250.3 u Segment Adjusted EBITDA Cost of services (133.4) 46.4% (116.1) 46.4% for 2019 included the acquisition of Alacare Support and overhead costs (103.6) 36.0%
Slide 11: Consolidated Adjusted EBITDA
Consolidated Adjusted EBITDA Consolidated Adjusted EBITDA for the quarter of $238.2 million % of Consolidated % of Consolidated ($millions) Q4 2019 Revenue Q4 2018 Revenue Inpatient rehabilitation segment Adjusted EBITDA $ 225.1 $ 211.7 Home health and hospice segment Adjusted EBITDA 49.6 44.1 Gener
Slide 12: Earnings per share - as reported
Earnings per share - as reported Q4 Year Ended u The increase in EPS for both periods of (In Millions, Except Per Share Data) 2019 2018 2019 2018 2019 resulted primarily from increased Adjusted EBITDA $ 238.2 $ 221.8 $ 964.9 $ 901.0 Adjusted EBITDA, a lower effective tax Depreciation and amortizatio
Slide 13: Adjusted earnings per share
Adjusted earnings per share(5) Q4 Year Ended 2019 2018 2019 2018 Earnings per share, as reported $ 0.68 $ 0.26 $ 3.62 $ 2.92 Adjustments, net of tax: Government, class action, and related settlements(4) — 0.52 — 0.52 Mark-to-market adjustment for stock appreciation rights (see page 19) 0.11 0.03 0.4
Slide 14: 2019 Adjusted free cash flow
2019 Adjusted free cash flow(6) $63.9 $10.7 ($70.1) ($11.9) ($14.2) $538.1 $516.5 Adjusted free cash Adjusted Working capital Cash interest Cash tax Maintenance Adjusted free cash flow FY 2018 EBITDA and other payments payments, capital expenditures flow FY 2019 net of refunds u Adjusted free cash f
Slide 15: 2020 Guidance
2020 Guidance 2019 2020 Actuals Guidance Net operating revenues Net operating revenues $4,605.0 million $4,850 million to $4,950 million Adjusted EBITDA(7) Adjusted EBITDA(7) $964.9 million $935 million to $965 million Adjusted earnings per share Adjusted earnings per share from continuing operation
Slide 16: 2020 Guidance considerations
2020 Guidance considerations Inpatient Rehabilitation Home Health and Hospice u Estimated 0% to 0.75% increase in Medicare u Estimated 2.0% to 3.0% net Medicare pricing pricing for Q1 through Q3 and anticipated 2.5% decrease for CY 2020 for home health (see page increase for Q4 (see page 26) 27) u S
Slide 17: Adjusted free cash flow assumptions
Adjusted free cash flow(6) assumptions Certain cash flow items 2019 2020 (millions) Actuals Assumptions u Increased cash interest payments expected in 2020 due to new borrowings in 2019 to fund the acquisition of Alacare Cash interest payments (net of and the exercise of the home amortization of deb
Slide 18: Uses of free cash flow
Uses of free cash flow 2019 2020 Actuals Assumptions IRF bed expansions $39.8 $40 to $50 New IRFs - De novos 114.2 200 to 240 Growth in core - Acquisitions — opportunistic business - Replacement IRFs and other 83.1 45 to 65 Home health and hospice acquisitions (includes Alacare in 2019) 231.5 50 to
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 89 of EHC’s IRFs have an EHC home health location within the service area.* Portfolio as of December 31, 2019 Inpatient rehabilitation hospitals (“IRFs”) Home health locations Hospice locations 9 Future
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 Dec. 31, 2019 Previously announced IRF # of New Beds 9 2019 2020 2021 development projects underway De novo: Katy, TX 40 — — 1 Murrieta, CA — 50 — 3 New states 2 Sioux Falls, SD — 40 — 3 Toledo, OH 40 4 Cumming, GA — — 50 Q4 2019 expansi
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: 2020 to 2022
Business outlook: 2020 to 2022 2020 2021 2022 • Enhance clinical collaboration between the Company’s IRFs and home health locations • Build stroke market share Key • Develop and implement post-acute solutions operational • Implement changes to reimbursement models initiatives in both business segmen
Slide 26: Business outlook 2020 to 2022: revenue assumptions
Business outlook 2020 to 2022: revenue assumptions Inpatient Rehabilitation* Volume 3+% annual discharge growth (includes new stores) Approximately 72% of segment revenue Medicare Pricing FY 2020 FY 2021 FY 2022 Amounts are approximations Q419-Q320(9) Q420-Q321 Q421-Q322 Final Rule Estimate† Estimat
Slide 27: Business outlook 2020 to 2022: revenue assumptions
Business outlook 2020 to 2022: revenue assumptions Home Health* Volume 10+% annual admission growth (includes new stores) Approximately 84% of segment revenue Medicare Pricing CY 2020 CY 2021 CY 2022 Amounts are approximations Q120-Q420(10) Q121-Q421 Q122-Q422 Final Rule Estimate† Estimate† Market b
Slide 28: Business outlook 2020 to 2022: labor and other expense assumptions
Business outlook 2020 to 2022: labor and other expense assumptions Inpatient Rehabilitation Home Health and Hospice Salaries and Benefits 2020 2021 2022 Salary increases ~3.0% 2.85-3.35% 2.85-3.35% Benefit costs increases 8-12% 5-10% 5-10% Segment Operating Expenses Salaries Salaries and benefits an
Slide 29: Debt schedule
Debt schedule Change in December 31, December 31, Debt vs. ($millions) 2019 2018 YE 2018 Advances under $1 billion revolving credit facility, November 2024 - LIBOR +150bps $ 45.0 $ 30.0 $ 15.0 Term loan facility, November 2024 - LIBOR +150bps 265.2 280.1 (14.9) Bonds Payable: 5.125% Senior Notes due
Slide 30: Debt maturity profile - face value
Debt maturity profile - face value As of December 31, 2019* ($ in millions) $916 Available Callable beginning $45 Drawn + November 2017 $39 reserved Callable beginning for LC’s Revolver February 2023 Callable beginning capacity February 2025 $700 Callable beginning Callable beginning Senior Septembe
Slide 31: New-store/same-store growth Inpatient Rehabilitation
New-store/same-store growth Inpatient Rehabilitation 25.0 20.0 Yuma, AZ (51 beds)(2) Shelby County, AL (34 beds) Boise, ID (40 beds) Bluffton, SC (38 beds) Katy, TX (40 beds) Gulfport, MS (33 beds) 15.0 Westerville, OH (60 beds) Murrells Inlet, Lubbock, TX Pearland, TX SC (29 beds) (40 beds) 10.0 (4
Slide 32: New-store/same-store growth Home Health
New-store/same-store growth Home Health Acquired Alacare Home Health & Hospice 30.0 (23 home health locations in Alabama) in July 2019 25.0 Acquired Camellia Healthcare (14 home health locations in 3 states) 20.0 in May 2018 15.0 10.0 5.0 0.0 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q
Slide 33: New-store/same-store growth Hospice
New-store/same-store growth Hospice Acquired Camellia Healthcare (18 hospice locations in 3 states) Acquired Alacare Home Health & Hospice in May 2018 (23 hospice locations in Alabama) 60.0 in July 2019 40.0 20.0 0.0 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3
Slide 34: Payment sources (percent of revenues)
Payment sources (percent of revenues) Inpatient Home Health Rehabilitation and Hospice Consolidated Segment Segment Q4 Q4 Q4 Full Year 2019 2018 2019 2018 2019 2018 2019 2018 Medicare 71.9% 73.4% 83.8% 85.0% 74.8% 76.0% 75.1% 75.9% Medicare Advantage 11.1% 9.5% 10.1% 9.6% 10.8% 9.5% 10.6% 9.2% Manag
Slide 35: Inpatient rehabilitation operational and labor metrics
Inpatient rehabilitation operational and labor metrics Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2019 2019 2019 2019 2018 2018 2018 2018 2019 2018 (In Millions) Net patient revenue- inpatient $ 873.5 $ 850.6 $ 851.8 $ 847.6 $ 822.8 $ 798.4 $ 809.6 $ 817.1 $ 3,423.5 $ 3,247.9 Net patient revenue- outpatient
Slide 36: Home health and hospice operational metrics
Home health and hospice operational metrics Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2019 2019 2019 2019 2018 2018 2018 2018 2019 2018 (In Millions) Net home health revenue $ 236.9 $ 238.9 $ 222.7 $ 219.5 $ 215.3 $ 209.2 $ 204.8 $ 185.3 $ 918.0 $ 814.6 Net hospice revenue 50.8 50.4 38.4 34.4 35.0 32.8 28.3
Slide 37: Share information
Share information Weighted Average for the Period Q4 Full Year (Millions) 2019 2018 2019 2018 2017 Basic shares outstanding(18) 97.8 98.0 98.0 97.9 93.7 Convertible senior subordinated notes(18) — — — — 4.0 Restricted stock awards, dilutive stock options, restricted stock units, and common stock war
Slide 38: Segment operating results
Segment operating results Q4 2019 Q4 2018 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 896.7 $ 287.7 $ — $ 1,184.4 $ 845.7 $ 250.3 $ — $ 1,096.0 Operating Expenses: Inpatient Rehabilitation: Salaries and
Slide 39: Segment operating results
Segment operating results Year Ended December 31, 2019 Year Ended December 31, 2018 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 3,513.0 $ 1,092.0 $ — $ 4,605.0 $ 3,346.2 $ 931.1 $ — $ 4,277.3 Operating E
Slide 40: Reconciliation of net income to Adjusted EBITDA
Reconciliation of net income to Adjusted EBITDA(7) 2019 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 $ 125.2 $ 110.9 $ 119.5 $ 90.2 $ 445.8 Loss from disc ops, net of tax, attributable to Encompa
Slide 41: Reconciliation of net income to Adjusted EBITDA
Reconciliation of net income to Adjusted EBITDA(7) 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 42: Net cash provided by operating activities reconciled to Adjusted EBITDA
Net cash provided by operating activities reconciled to Adjusted EBITDA(7) Q4 Full Year (In Millions) 2019 2018 2019 2018 Net cash provided by operating activities $ 215.6 $ 178.4 $ 635.3 $ 762.4 Interest expense and amortization of debt discounts and fees 44.5 36.7 159.7 147.3 Equity in net income
Slide 43: Reconciliation of segment Adjusted EBITDA to income from continuing operations before income tax
Reconciliation of segment Adjusted EBITDA to income from continuing operations before income tax expense Three Months Ended Year Ended December 31, December 31, 2019 2018 2019 2018 (In Millions) Total segment Adjusted EBITDA $ 274.7 $ 255.8 $ 1,095.4 $ 1,034.3 General and administrative expenses (64
Slide 44: 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(6) Q4 Full Year (In Millions) 2019 2018 2019 2018 Net cash provided by operating activities $ 215.6 $ 178.4 $ 635.3 $ 762.4 Impact of discontinued operations (0.2) (1.5) 4.4 (0.8) Net cash provided by operating ac
Slide 45: Adjusted EPS - Q4 2019
Adjusted EPS(5) - Q4 2019 For the Three Months Ended December 31, 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 P
Slide 46: Adjusted EPS - Q4 2018
Adjusted EPS(5) - Q4 2018 For the Three Months Ended December 31, 2018 Adjustments Mark-to- Market Change in Gov't, Class Adjustment Fair Market Action, & for Stock Value of As Related Compensation Income Tax Equity As Reported Settlements Expense Adjustments Securities Adjusted (In Millions, Except
Slide 47: Adjusted EPS - YTD 2019
Adjusted EPS(5) - YTD 2019 For the Year Ended December 31, 2019 Adjustments Mark-to- Loss Market on Change in Adjustment Early Fair Market Payroll for Stock Exting. Value of Gain on Taxes on As Comp. of Income Tax Transaction Equity Consolidation SARs As Reported Expense Debt Adjustments Costs Secur
Slide 48: Adjusted EPS - YTD 2018
Adjusted EPS(5) - YTD 2018 For the Year Ended December 31, 2018 Adjustments Mark-to- Market Change in Gov't, Class Adjust. on Fair Market Action, & Stock Value of As Related Comp. Income Tax Transaction Equity As Reported Settlements Expense Adjustments Costs Securities Adjusted (In Millions, Except
Slide 49: End notes
End notes (1) On Oct. 28, 2013, the Company announced its board of directors authorized the repurchase of up to $200 million of its common stock. On Feb. 14, 2014, the Company's board approved an increase in this common stock repurchase authorization from $200 million to $250 million. As of June 30,
Slide 50: End notes, con't.
End notes, con’t. (9) On July 31, 2019, the Centers for Medicare and Medicaid Services released its notice of final rule making for fiscal year 2020 under the inpatient rehabilitation facility prospective payment system (the “2020 Final IRF Rule”). Based on its analysis of the adjustments included i