Encompass Health Corporation · NYSE:EHC
Encompass Health — Q2 2017 Earnings Presentation
50 slides from Encompass Health's earnings presentation, Aug 1, 2017
Slide 1: Second Quarter 2017 Earnings Call
Second Quarter 2017 Earnings Call August 1, 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 Q2 2017 Summary................................................................................................................................................. 4-5 Rebranding and Name Change Initiative ...............................................................................
Slide 4: Q2 2017 Summary
Q2 2017 Summary Q2 Growth (In Millions) Q2 2017 Q2 2016 Dollars Percent HealthSouth Consolidated Net operating revenues $ 981.3 $ 920.7 $ 60.6 6.6% Adjusted EBITDA $ 209.5 $ 204.3 $ 5.2 2.5% Inpatient Rehabilitation Segment Net operating revenues $ 790.0 $ 752.6 $ 37.4 5.0% Adjusted EBITDA $ 208.4 $
Slide 5: Q2 2017 Summary (cont.)
Q2 2017 Summary (cont.) u Balance Sheet Leverage ratio of 3.3x at end of second quarter Exercised early redemption option on all $320 million of 2.0% Convertible Senior Subordinated Notes due 2043 ü Issued 8.9 million shares to holders who converted $319.4 million in principal of notes § 8.6 mil
Slide 6: Rebranding and Name Change Initiative
Rebranding and Name Change Initiative u Both business segments — inpatient rehabilitation and home health and hospice — will transition to the Encompass Health branding by the end of 2019. Rebranding and name change reinforce the Company’s existing strategy and position as an integrated provider o
Slide 7: IRF-Home Health Clinical Collaboration (All Payors)
IRF-Home Health Clinical Collaboration (All Payors) Overlap Markets* 28.6% Collaboration Rate u As of June 30, 2017, 60% of HealthSouth’s 23.6% IRFs were located within overlap markets.* Collaboration Rate u The clinical collaboration rate with 4,305 HealthSouth’s IRFs increased by 500 basis points
Slide 8: Inpatient Rehabilitation Segment - Revenue
Inpatient Rehabilitation Segment - Revenue Q2 Q2 Favorable/ ($millions) 2017 2016 (Unfavorable) Net operating revenues: Inpatient $ 762.9 $ 721.2 5.8% Outpatient and other 27.1 31.4 (13.7%) Total segment revenue $ 790.0 $ 752.6 5.0% (Actual Amounts) Discharges 42,805 41,365 3.5% Same-store discharge
Slide 9: Inpatient Rehabilitation Segment - Adjusted EBITDA
Inpatient Rehabilitation Segment - Adjusted EBITDA Q2 % of Q2 % of Segment Adjusted ($millions) 2017 Revenue 2016 Revenue EBITDA for the quarter Net operating revenues $ 790.0 $ 752.6 of $208.4 million Less: Provision for doubtful accounts (12.4) 1.6% (14.5) 1.9% Net operating revenues less provisio
Slide 10: Home Health and Hospice Segment - Revenue
Home Health and Hospice Segment - Revenue Q2 Q2 Favorable/ ($millions) 2017 2016 (Unfavorable) Net operating revenues: Home health revenue $ 172.9 $ 157.1 10.1 % Hospice revenue 18.4 11.0 67.3 % Total segment revenue $ 191.3 $ 168.1 13.8 % (Actual Amounts) Admissions 30,823 25,753 19.7 % Same-store
Slide 11: Home Health and Hospice Segment - Adjusted EBITDA
Home Health and Hospice Segment - Adjusted EBITDA Q2 Q2 % of % of ($millions) 2017 Revenue 2016 Revenue Net operating revenues $ 191.3 $ 168.1 Less: Provision for doubtful accounts (1.3) 0.7% (0.9) 0.5% Segment Adjusted EBITDA for the Net operating revenues less provision for doubtful accounts 190.0
Slide 12: Consolidated Adjusted EBITDA
Consolidated Adjusted EBITDA % of % of Q2 Consolidated Q2 Consolidated ($millions) 2017 Revenue 2016 Revenue Inpatient rehabilitation segment Adjusted EBITDA $ 208.4 $ 204.1 Home health and hospice segment Adjusted EBITDA 32.8 26.0 Consolidated General and administrative expenses* (31.7) 3.2% (25.8)
Slide 13: Earnings per Share - As Reported
Earnings per Share - As Reported Q2 6 Months u EPS for the second quarter of 2017 (In Millions, Except Per Share Data) 2017 2016 2017 2016 and first half of 2017 were impacted Consolidated Adjusted EBITDA 209.5 204.3 410.3 396.4 by: Interest expense and amortization of debt Lower interest expense
Slide 14: Adjusted Earnings per Share
Adjusted Earnings per Share(7) Q2 6 Months 2017 2016 2017 2016 Earnings per share, as reported $ 0.70 $ 0.65 $ 1.42 $ 1.26 Adjustments, net of tax: Professional fees — accounting, tax, and legal — 0.01 — 0.01 Mark-to-market adjustment for stock appreciation rights(5) 0.07 0.02 0.09 — Income tax adju
Slide 15: 2017 Adjusted Free Cash Flow
2017 Adjusted Free Cash Flow(8) $24.3 $6.2 $13.9 ($31.2) ($13.9) $254.7 $254.0 Adjusted Free Cash Adjusted Working Capital Cash Interest Cash Tax Maintenance Adjusted Free Cash Flow 6 Mos. 2016 (8) EBITDA and Other Expense Payments, Capital Expenditures Flow 6 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 May 16, 2017) (As of July 31, 2017) Net Operating Revenues Net Operating Revenues $3,850 million to $3,950 million $3,875 million to $3,950 million Adjusted EBITDA(9) Adjusted EBITDA(9) $800 million to $
Slide 17: Guidance Considerations
Guidance Considerations Inpatient Rehabilitation Home Health and Hospice u Estimated 1.9% increase in Medicare u Estimated 1.5% to 2.0%, or ~$5 million to pricing for Q1 through Q3; ~0.8% for Q4 $7 million, net Medicare pricing reduction for second half of 2017 u Salary increase of ~3.0% u Salary in
Slide 18: Adjusted Free Cash Flow and Tax Assumptions
Adjusted Free Cash Flow(8) and Tax Assumptions 6 Months u 2017 assumption for cash interest Certain Cash Flow Items 2017 2016 2017 expense was revised from a range of (millions) Assumptions Actual Actual $150 to $160 million to a range of $145 to $155 million due to the Company’s exercise of its ear
Slide 19: Free Cash Flow Priorities
Free Cash Flow Priorities (In Millions) 6 Months 2017 2017 2016 Highest Priority Actuals Assumptions Actuals IRF bed expansions $8.0 $30 to $40 $19.1 Growth New IRF’s in Core - De novos 44.0 85 to 105 72.6 Business - Acquisitions 10.9 TBD — - Replacement hospitals and other 3.2 10 to 20 11.1 New hom
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 June 30, 2017 Portfolio – As of June 30, 2017 IRF Market Share Inpatient Rehabilita
Slide 22: Pre-Payment Claims Denials - Inpatient Rehabilitation Segment
Pre-Payment Claims Denials - Inpatient Rehabilitation Segment Background HealthSouth reserves for pre-payment claim denials via the provision for doubtful accounts upon notice from a MAC that a claim is under review. For several years, under programs designated as “widespread probes,” certain Medi
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 — Q2 2017 expansion activity highlights: 3 Hilton Head, SC — 38 — u Began operating an exi
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 - (~$78 million authorization remaining as of June 30, 2017) Strategy Component Strong •
Slide 25: IRF-PPS Fiscal Year 2018 Proposed Rule: Key Provisions
IRF-PPS Fiscal Year 2018 Proposed Rule: Key Provisions Update to Payment Rates The proposed rule would: Company Observations • Implement a net 1.0% market basket increase as established by the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015; • Update Case-Mix Group Relative Weights and
Slide 26: HH-PPS Calendar Year 2018 Proposed Rule: Key Provisions
HH-PPS Calendar Year 2018 Proposed Rule: Key Provisions Proposed Update to 2018 Payment Rates Company Observations The proposed rule would: 2018 Pricing: • Implement a net 1.0% market basket increase as established by the • While we continue to review the details of Medicare Access and CHIP Reauthor
Slide 27: Business Outlook 2017 to 2019: Revenue Assumptions
Business Outlook 2017 to 2019: Revenue Assumptions Inpatient Rehabilitation Home Health & Hospice Volume (Includes New Stores) • 3+% annual discharge growth • 10+% annual episode growth • 10% to15% annual episode Approx. 73% of Revenue growth Approx. 85% of Revenue Medicare Pricing FY 2017 FY 2018 F
Slide 28: Business Outlook 2017 to 2019: Labor and Other Expense Assumptions
Business Outlook 2017 to 2019: Labor and Other Expense Assumptions Inpatient Rehabilitation Home Health and Hospice Salaries and Benefits 2017 2018 2019 Salary increases 2.75-3.25% 2.75-3.25% 2.75-3.25% Benefit costs increases 5-10% 5-10% 5-10% Salaries Percent of Salaries & Benefits Salaries & Bene
Slide 29: Debt Schedule
Debt Schedule Change in June 30, Dec. 31, Debt vs. ($millions) 2017 2016 YE 2016 Advances under $600 million revolving credit facility, July 2020 - LIBOR +200bps $ 70.0 $ 152.0 $ (82.0) Term loan facility, July 2020 - LIBOR +200bps 410.2 421.2 (11.0) Bonds Payable: 5.125% Senior Notes due 2023 295.6
Slide 30: Debt Maturity Profile - Face Value
Debt Maturity Profile - Face Value HealthSouth is positioned with a cost-efficient, flexible capital structure. As of June 30, 2017* Callable beginning September 2020 ($ in millions) Callable beginning November 2017 $1,200 Callable beginning Senior $496 March 2018 Notes Available 5.75% $70 Drawn Rev
Slide 31: New-Store/Same-Store IRF Growth
New-Store/Same-Store IRF Growth Hot Springs, AR (27 beds) Reliant (857 beds) 25.0 Franklin, TN (40 beds) Bryan, TX (49 beds) 20.0 Lexington, KY (158 beds) Broken Arrow, OK (22 beds) Savannah, GA (50 beds) Altamonte Springs, FL (50 beds) 15.0 Johnson City, TN (26 beds) Gulfport, MS (33 beds) Newnan,
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 2017 2016 2017 2016 2017 2016 2017 2016 2016 Medicare 72.8% 73.1% 84.9% 82.3% 75.3% 74.7% 75.1% 75.1% 75.2% Medicare Advantage 8.7% 7.8% 10.1% 9.0% 8.9% 8.1
Slide 33: Inpatient Rehabilitation Operational and Labor Metrics
Inpatient Rehabilitation Operational and Labor Metrics Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2017 2017 2016 2016 2016 2016 2016 (In Millions) Net patient revenue-inpatient $ 762.9 $ 766.2 $ 740.9 $ 724.1 $ 721.2 $ 719.4 $ 2,905.5 Net patient revenue-outpatient and other revenues 27.1 26.3 26.7 27.6 31.4 29.8
Slide 34: Home Health and Hospice Operational Metrics
Home Health and Hospice Operational Metrics Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2017 2017 2016 2016 2016 2016 2016 (In Millions) Net home health revenue $ 172.9 $ 165.3 $ 165.2 $ 162.0 $ 157.1 $ 150.9 $ 635.2 Net hospice and other revenue 18.4 17.0 17.1 13.1 11.0 9.7 50.9 Net operating revenues $ 191.3 $ 18
Slide 35: Share Information
Share Information Weighted Average for the Period Q2 6 Months Full Year (Millions) 2017 2016 2017 2016 2016 2015 2014 Basic shares outstanding(20)(21) 90.3 89.3 89.5 89.4 89.1 89.4 86.8 Convertible perpetual preferred stock(20) — — — — — 1.0 3.2 Convertible senior subordinated notes(21) 7.5 8.5 8.1
Slide 36: Segment Operating Results
Segment Operating Results Q2 2017 Q2 2016 Home Home Health and HealthSouth Health and HealthSouth IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 790.0 $ 191.3 $ — $ 981.3 $ 752.6 $ 168.1 $ — $ 920.7 Less: Provision for doubtful accounts (12.4) (1.3) —
Slide 37: Segment Operating Results
Segment Operating Results Six Months Ended June 30, 2017 Six Months Ended June 30, 2016 Home Home Health and HLS Health and HLS Inpatient Hospice Reclasses Consolidated Inpatient Hospice Reclasses Consolidated Net operating revenues $ 1,582.5 $ 373.6 $ — $ 1,956.1 $ 1,501.8 $ 328.7 $ — $ 1,830.5 Les
Slide 38: 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 39: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA(9) 2017 Q1 Q2 6 Months Per Per Per (in millions, except per share data) Total Share Total Share Total Share Net Income $ 84.4 $ 79.4 $ 163.8 Loss (income) from disc ops, net of tax, attributable to HealthSouth 0.3 (0.2) 0.1 Net income attributable to n
Slide 40: 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 41: Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA
Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q2 6 Months Full Year (In Millions) 2017 2016 2017 2016 2016 Net cash provided by operating activities $ 151.2 $ 152.2 $ 332.0 $ 321.8 $ 634.4 Provision for doubtful accounts (13.7) (15.4) (30.1) (31.9) (61.2) Professional fees
Slide 42: 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 Six Months Ended Year Ended June 30, June 30, December 31, 2017 2016 2017 2016 2016 (In Millions) Total segment Adjusted EBITDA $ 241.2 $ 230.1 $ 470.5 $ 449.6 $ 899.6 General
Slide 43: Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow
Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow(8) Q2 6 Months Full-Year (In Millions) 2017 2016 2017 2016 2016 Net cash provided by operating activities $ 151.2 $ 152.2 $ 332.0 $ 321.8 $ 634.4 Impact of discontinued operations 0.2 0.3 0.6 0.5 0.7 Net cash prov
Slide 44: Adjusted EPS - Q2 2017
Adjusted EPS(7) - Q2 2017 For the Three Months Ended June 30, 2017 Adjustments Mark-to- Market Adjustment for Stock As Appreciation Income Tax Reported Rights Adjustments(6) As Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 209.5 $ — $ — $ 209.5 Depreciation and amortization (45.
Slide 45: Adjusted EPS - Q2 2016
Adjusted EPS(7) - Q2 2016 For the Three Months Ended June 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 Amounts) A
Slide 46: Adjusted EPS - YTD 2017
Adjusted EPS(7) - YTD 2017 For the Six Months Ended June 30, 2017 Adjustments Mark-to- Market Adjustment for Stock As Appreciation Income Tax As Reported Rights Adjustments(6) Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 410.3 $ — $ — $ 410.3 Depreciation and amortization (91.0
Slide 47: Adjusted EPS - YTD 2016
Adjusted EPS(7) - YTD 2016 For the Six Months Ended June 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 Amounts) Ad
Slide 48: End Notes
End Notes (1) CMS periodically retroactively updates Supplemental Security Income (“SSI”) ratios that are used to determine the adjustments to Medicare payment rates for low- income patients. In June 2017, CMS updated ratios for October 2014 through June 2017. As a result, our net operating revenues
Slide 49: 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 50: End Notes, con't.
End Notes, con’t. (15) Represents discharges from 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 (16) Excludes approximately 430 full-tim