Encompass Health Corporation · NYSE:EHC
Encompass Health — Q2 2016 Earnings Presentation
45 slides from Encompass Health's earnings presentation, Jul 29, 2016
Slide 1: Second Quarter 2016 Earnings Call
Second Quarter 2016 Earnings Call July 29, 2016 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 2016 Summary................................................................................................................................................. 4-5 Inpatient Rehabilitation Segment ....................................................................................
Slide 4: Q2 2016 Summary (Q2 2016 vs. Q2 2015)
Q2 2016 Summary (Q2 2016 vs. Q2 2015) Growth (In Millions) Q2 2016 Q2 2015 Dollars Percent HealthSouth Consolidated Net operating revenues $ 920.7 $ 764.4 $ 156.3 20.4% Adjusted EBITDA $ 204.3 $ 169.5 $ 34.8 20.5% Inpatient Rehabilitation Segment Net operating revenues $ 752.6 $ 645.3 $ 107.3 16.6%
Slide 5: Q2 2016 Summary (cont.)
Q2 2016 Summary (cont.) u Balance sheet Reduced debt by ~$30 million (~$85 million year to date) ü Reduced leverage ratio by 0.2x to 4.1x - See page 23. Redeemed $50 million of 7.75% Senior Notes due 2022 in May 2016 Moody’s revised its rating outlook on the Company from negative to stable.
Slide 6: Inpatient Rehabilitation Segment - Revenue
Inpatient Rehabilitation Segment - Revenue Q2 Q2 Favorable/ ($millions) 2016 2015 (Unfavorable) Net operating revenues: Inpatient $ 721.2 $ 618.7 16.6% Outpatient and other 31.4 26.6 18.0% Total segment revenue $ 752.6 $ 645.3 16.6% (Actual Amounts) Discharges 41,365 36,408 13.6% Same-store discharg
Slide 7: Inpatient Rehabilitation Segment - Adjusted EBITDA
Inpatient Rehabilitation Segment - Adjusted EBITDA Segment Adjusted Q2 % of Q2 % of EBITDA for the quarter ($millions) 2016 Revenue 2015 Revenue of $204.1 million Net operating revenues $ 752.6 $ 645.3 Less: Provision for doubtful accounts (14.5) 1.9% (10.2) 1.6% - Q2 2015 expense ratios were Net op
Slide 8: Home Health and Hospice Segment - Revenue
Home Health and Hospice Segment - Revenue Q2 Q2 Favorable/ ($millions) 2016 2015 (Unfavorable) Net operating revenues: Home health revenue $ 157.1 $ 111.5 40.9 % Hospice revenue 11.0 7.6 44.7 % Total segment revenue $ 168.1 $ 119.1 41.1 % (Actual Amounts) Admissions 25,753 16,862 52.7 % Same-store a
Slide 9: Home Health and Hospice Segment - Adjusted EBITDA
Home Health and Hospice Segment - Adjusted EBITDA Q2 Q2 % of % of ($millions) 2016 Revenue 2015 Revenue Net operating revenues $ 168.1 $ 119.1 Segment Adjusted Less: Provision for doubtful accounts (0.9) 0.5% (0.7) 0.6% EBITDA for the Net operating revenues less provision for doubtful accounts 167.2
Slide 10: Earnings per Share - As Reported
Earnings per Share - As Reported Q2 6 Months (In Millions, Except Per Share Data) 2016 2015 2016 2015 u Earnings per share for the second Inpatient rehabilitation segment Adjusted EBITDA $ 204.1 $ 170.5 $ 401.0 $ 334.9 quarter and first half of 2016 were Home health and hospice segment Adjusted impa
Slide 11: Adjusted Earnings per Share
Adjusted Earnings per Share(4) Q2 6 Months 2016 2015 2016 2015 Earnings per share, as reported $ 0.65 $ 0.47 $ 1.26 $ 0.91 Adjustments, net of tax: Government, class action, and related settlements — — — 0.05 Professional fees — accounting, tax, and legal 0.01 — 0.01 0.01 Mark-to-market adjustment f
Slide 12: Adjusted Free Cash Flow - Year to Date
Adjusted Free Cash Flow(6) - Year to Date $70.8 $28.6 $3.1 ($4.1) ($24.8) ($2.7) $244.8 $173.9 Adjusted Free Cash Adjusted Cash Interest Cash Tax Payments, Working Capital Maintenance Capital Preferred Adjusted Free Cash Flow 6 Mos. 2015 EBITDA Expense Net of Refunds and Other Expenditures Dividends
Slide 13: Revised Guidance
Revised Guidance Previous Full-Year Revised 2016 Full-Year Projected Growth Guidance Guidance Over 2015 (Provided on April 26, 2016) Net Operating Revenues +$20 Net Operating Revenues 13% million to $3,580 million to $3,680 million $3,600 million to $3,700 million 17% Adjusted EBITDA +$5 Adjusted EB
Slide 14: Guidance Considerations
Guidance Considerations Inpatient Rehabilitation Home Health and Hospice u Full-year contribution from Reliant and other u Full-year contribution from CareSouth 2015 acquisitions and openings and other 2015 acquisitions and Transitioning to HLS business model openings u Continued evolution of payo
Slide 15: Appendix
Appendix HEALTHSOUTH.
Slide 16: HealthSouth: A Leading Provider of Post-Acute Care
HealthSouth: A Leading Provider of Post-Acute Care 58% 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, 2016 IRF Marketshare Portfolio – As of June 30, 2016 Inpatient Rehabilitati
Slide 17: Clinical Collaboration
Clinical Collaboration All Markets Overlap Markets* - Represents discharges from all payors - 13.9% Collaboration Rate 10.6% 23.6% 3,238 Collaboration Rate Collaboration Rate 2,116 18.4% Collaboration Rate 3,191 2,037 19,977 17,907 10,307 9,041 Q2 2015 Q2 2016 Q2 2015 Q2 2016 HealthSouth IRF Dischar
Slide 18: Pre-Payment Claims Denials - Inpatient Rehabilitation Segment
Pre-Payment Claims Denials - Inpatient Rehabilitation Segment Background For several years, under programs designated as “widespread Impact to Income Statement probes,” certain Medicare Administrative Contractors (“MACs”) have conducted pre-payment claim reviews and denied Collections of Bad Debt
Slide 19: Expansion Activity
IRF Development Expansion Activity 11 Projects 2 New States Inpatient Rehabilitation Facilities Q2 2016 expansion activity highlights: # of New Beds u Received CON to build a 34-bed hospital in 2016 2017 2018 Shelby County, AL De Novo: u Expect to begin operating a 22-bed unit in 1 Modesto, CA 50 —
Slide 20: Business Outlook: Revenue Assumptions
Business Outlook: Revenue Assumptions Inpatient Rehabilitation* Home Health & Hospice* Volume • 3+% annual discharge growth • 10+% annual episode growth • • 10% to15% Includes annual $30-$40 episode million per growth annum in agency acquisitions • Includes $35-$40 million per Approx. 73% of Revenue
Slide 21: Adjusted Free Cash Flow and Tax Assumptions
Adjusted Free Cash Flow(6) and Tax Assumptions Certain Cash Flow Items 6 Months 2016 2015 u Revised cash interest (millions) 2016 Actual Assumptions Actual expense assumptions due to the redemptions of the 2022 Notes • Cash interest expense $81.2 $160 to $165 $128.6 u Decreased estimated cash (net o
Slide 22: Free Cash Flow Priorities
Free Cash Flow Priorities (In Millions) 6 Months 2016 2016 2015 Highest Priority Actuals Assumptions Actuals IRF bed expansions $10.5 $20 to $30 $20.8 Growth New IRF’s in Core - De novos 37.5 70 to 90 47.8 Business - Acquisitions — 0 to 20 786.2 New home health and hospice acquisitions 9.4 30 to 40
Slide 23: Debt Schedule
Debt Schedule Change in June 30, Dec. 31, Debt vs. ($millions) 2016 2015 YE 2015 Advances under $600 million revolving credit facility, July 2020 - LIBOR +200bps $ 150.0 $ 130.0 $ 20.0 Term loan facility, July 2020 - LIBOR +200bps 432.3 443.3 (11.0) Bonds Payable: 7.75% Senior Notes due 2022 75.3 17
Slide 24: Debt Maturity Profile - Face Value
Debt Maturity Profile - Face Value HealthSouth is positioned with a cost-efficient, flexible capital structure. As of June 30, 2016* ($ in millions) Callable beginning March 2018 Callable beginning November 2017 Fully callable; redeemed $100 million in first half of 2016; redemption price decreases
Slide 25: New-Store/Same-Store IRF Growth
New-Store/Same-Store IRF Growth 25.0 Reliant (857 beds) Hot Springs, AR (27 beds) 20.0 Franklin, TN (40 beds) Altamonte Springs, FL (50 beds) Augusta, GA (58 beds) 15.0 Johnson City, TN (26 beds) Littleton, CO (40 beds) Newnan, GA (50 beds) Lexington, KY (158 beds) Stuart, FL (34 beds) Middletown, D
Slide 26: 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 2016 2015 2016 2015 2016 2015 2016 2015 2015 Medicare 73.1% 72.7% 82.3% 83.9% 74.7% 74.5% 75.1% 74.7% 74.9% Medicare Advantage 7.8% 7.8% 9.0% 7.2% 8.1% 7.7%
Slide 27: Independent Research Concludes IRFs are a Better Rehabilitation Option than SNFs
Independent Research Concludes IRFs are a Better Rehabilitation Option than SNFs “Whenever possible, the American Stroke Association strongly recommends that stroke patients be treated at an inpatient rehabilitation facility rather than a skilled nursing facility. While in an inpatient rehabilitatio
Slide 28: Inpatient Rehabilitation Operational and Labor Metrics
Inpatient Rehabilitation Operational and Labor Metrics Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2016 2016 2015 2015 2015 2015 2015 (In Millions) Net patient revenue-inpatient $ 721.2 $ 719.4 $ 696.8 $ 625.1 $ 618.7 $ 606.6 $ 2,547.2 Net patient revenue-outpatient and other revenues 31.4 29.8 29.1 26.5 26.6 23.7
Slide 29: Home Health and Hospice Operational Metrics
Home Health and Hospice Operational Metrics Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2016 2016 2015 2015 2015 2015 2015 (In Millions) Net home health revenue $ 157.1 $ 150.9 $ 144.4 $ 118.3 $ 111.5 $ 103.9 $ 478.1 Net hospice and other revenue 11.0 9.7 9.0 8.7 7.6 6.4 31.7 Net operating revenues $ 168.1 $ 160.6
Slide 30: Share Information
Share Information Weighted Average for the Period Q2 6 Months Full Year (Millions) 2016 2015 2016 2015 2015 2014 2013 Basic shares outstanding(11) 89.3 89.8 89.4 88.4 89.4 86.8 88.1 Convertible perpetual preferred stock(11) — 0.8 — 2.0 1.0 3.2 10.5 Convertible senior subordinated notes(21) 8.5 8.2 8
Slide 31: Segment Operating Results
Segment Operating Results Q2 2016 Q2 2015 Home HealthSouth Home HealthSouth Health and Reclasses Consolidated Health and Reclasses Consolidated IRF Hospice IRF Hospice Net operating revenues $ 752.6 $ 168.1 $ — $ 920.7 $ 645.3 $ 119.1 $ — $ 764.4 Less: Provision for doubtful accounts (14.5) (0.9) —
Slide 32: Segment Operating Results
Segment Operating Results Six Months Ended June 30, 2016 Six Months Ended June 30, 2015 Home HealthSouth Home HealthSouth Health and Reclasses Consolidated Health and Reclasses Consolidated IRF Hospice IRF Hospice Net operating revenues $ 1,501.8 $ 328.7 $ — $ 1,830.5 $ 1,275.6 $ 229.4 $ — $ 1,505.0
Slide 33: Segment Operating Results
Segment Operating Results Year Ended December 31, 2015 Home Health and HealthSouth IRF Hospice Reclasses Consolidated Net operating revenues $ 2,653.1 $ 509.8 $ — $ 3,162.9 Less: Provision for doubtful accounts (44.7) (2.5) — (47.2) 2,608.4 507.3 — 3,115.7 Operating Expenses: Inpatient Rehabilitatio
Slide 34: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA(23) 2016 Q1 Q2 6 Months (in millions, except per share data) Total Per Share Total Per Share Total Per Share Net Income $ 76.7 $ 81.2 $ 157.9 Loss from disc ops, net of tax, attributable to HealthSouth 0.1 0.1 0.2 Net income attributable to noncontroll
Slide 35: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA(23) 2015 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 $ 59.0 $ 60.2 $ 67.8 $ 65.8 $ 252.8 Loss (income) from disc ops, net of tax, attributable to
Slide 36: 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 (Millions) 2016 2015 2016 2015 2015 Net cash provided by operating activities $ 152.2 $ 102.9 $ 311.9 $ 204.9 $ 484.8 Provision for doubtful accounts (15.4) (10.9) (31.9) (22.5) (47.2) Professional fees—acc
Slide 37: Reconciliation of Segment Adjusted EBITDA to Income from Continuing Operations 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, 2016 2015 2016 2015 2015 (In Millions) Total segment Adjusted EBITDA $ 230.1 $ 189.5 $ 449.6 $ 370.8 $ 774.1 General
Slide 38: 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(6) Full Q2 6 Months Year ($millions) 2016 2015 2016 2015 2015 Net cash provided by operating activities $ 152.2 $ 102.9 $ 311.9 $ 204.9 $ 484.8 Impact of discontinued operations 0.3 0.2 0.5 0.3 0.7 Net cash provid
Slide 39: Adjusted EPS - Q2 2016
Adjusted EPS(4) - Q2 2016 For the Three Months Ended June 30, 2016 Adjustments Mark-to- Professional Market Fees - Adjustment Accounting, for Stock Loss on Early As Tax, and Appreciation Extinguishment Sale of As Reported Legal Rights of Debt Hospital Adjusted (In Millions, Except Per Share Amounts)
Slide 40: Adjusted EPS - Q2 2015
Adjusted EPS(4) - Q2 2015 For the Three Months Ended June 30, 2015 Adjustments Professional Fees - Accounting, Loss on Early As Tax, and Transaction Extinguishment As Reported Legal Costs of Debt Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 169.5 $ — $ — $ — $ 169.5 Depreciatio
Slide 41: Adjusted EPS - YTD 2016
Adjusted EPS(4) - YTD 2016 For the Six Months Ended June 30, 2016 Adjustments Mark-to- Professional Market Fees - Adjustment Accounting, for Stock Loss on Early As Tax, and Appreciation Extinguishment Sale of As Reported Legal Rights of Debt Hospital Adjusted (In Millions, Except Per Share Amounts)
Slide 42: Adjusted EPS - YTD 2015
Adjusted EPS(4) - YTD 2015 For the Six Months Ended June 30, 2015 Professional Government, Fees - Class Action, Accounting, Loss on Early As and Related Tax, and Transaction Extinguishment As Reported Settlements Legal Costs of Debt Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $
Slide 43: End Notes
End Notes (1) CMS periodically retroactively updates Supplemental Security Income (“SSI”) ratios that are used to determine the adjustments to Medicare payment rate for low-income patients. In June 2015, CMS updated ratios for fiscal year 2013, and the Company retroactively recorded adjustments to f
Slide 44: End Notes, con't.
End Notes, con’t. (11) In March 2006, the Company completed the sale 400,000 shares of its 6.5% Series A Convertible Perpetual Preferred Stock. In Q4 2013, the Company exchanged $320 million of newly issued 2.0% Convertible Senior Subordinated Notes due 2043 for 257,110 shares of its outstanding pre
Slide 45: End Notes, con't.
End Notes, con’t. (22) The agreement to settle the Company’s class action securities litigation received final court approval in January 2007. The 5.0 million shares of common stock and warrants to purchase ~8.2 million shares of common stock at a strike price of $41.40 (expire January 17, 2017) rel