Encompass Health Corporation · NYSE:EHC
Encompass Health — Q1 2018 Earnings Presentation
47 slides from Encompass Health's earnings presentation, Apr 26, 2018
Slide 1: First Quarter 2018 Earnings Call
First Quarter 2018 Earnings Call April 26, 2018 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 Q1 2018 Summary............................................................................................................... 4-5 Clinical Collaboration Rate.................................................................................................... 6 Inpatient Rehabilitat
Slide 4: Q1 2018 Summary
Q1 2018 Summary Q1 Growth (In Millions) Q1 2018 Q1 2017 Dollars Percent Encompass Health Consolidated Net operating revenues* $ 1,046.0 $ 957.1 $ 88.9 9.3% Adjusted EBITDA $ 223.3 $ 200.8 $ 22.5 11.2% Inpatient Rehabilitation Segment Net operating revenues* $ 840.3 $ 777.8 $ 62.5 8.0% Adjusted EBITD
Slide 5: Q1 2018 Summary (cont.)
Q1 2018 Summary (cont.) u Expansion Activity (see page 22) Announced definitive agreement to acquire Camellia Healthcare ü 18 hospice, 14 home health, and 2 private duty locations in Mississippi, Alabama, Louisiana, and Tennessee ü $135 million cash purchase price expected to be funded with cash o
Slide 6: The Company Continues to Improve the Patient Experience Through Integrated Care Delivery
The Company Continues to Improve the Patient Experience Through Integrated Care Delivery Inpatient Rehabilitation–Home Health Clinical Collaboration (All Payors) Overlap Markets* 33.5% u As of March 31, 2018, ~60% of Encompass Collaboration Rate Health’s inpatient rehabilitation hospitals were 28.9%
Slide 7: Inpatient Rehabilitation Segment - Revenue
Inpatient Rehabilitation Segment - Revenue Q1 Q1 Favorable/ ($millions) 2018 2017 (Unfavorable) Net operating revenues:* Inpatient $ 817.1 $ 752.7 8.6% Outpatient and other 23.2 25.1 (7.6%) Total segment revenue $ 840.3 $ 777.8 8.0% (Actual Amounts) Discharges 45,108 42,259 6.7% Same-store discharge
Slide 8: Inpatient Rehabilitation Segment - Adjusted EBITDA
Inpatient Rehabilitation Segment - Adjusted EBITDA Q1 Q1 % of % of ($millions) 2018 Revenue 2017 Revenue u Segment Adjusted EBITDA for Net operating revenues* $ 840.3 $ 777.8 the quarter of $223.8 million Operating expenses: All expense ratios benefited Salaries and benefits (424.2) 50.5% (398.2)
Slide 9: Home Health and Hospice Segment - Revenue
Home Health and Hospice Segment - Revenue Q1 Q1 Favorable/ ($millions) 2018 2017 (Unfavorable) Net operating revenues:* Home health revenue $ 185.2 $ 163.7 13.1 % Hospice revenue 20.5 15.6 31.4 % Total segment revenue $ 205.7 $ 179.3 14.7 % Home Health Metrics (Actual Amounts) Admissions 33,855 30,8
Slide 10: Home Health and Hospice Segment - Adjusted EBITDA
Home Health and Hospice Segment - Adjusted EBITDA Q1 Q1 % of % of ($millions) 2018 Revenue 2017 Revenue Net operating revenues* $ 205.7 $ 179.3 u Segment Adjusted EBITDA for Operating expenses:(a) the quarter of $33.5 million. Cost of services (98.6) 47.9% (87.7) 48.9% Cost of services as a percen
Slide 11: Consolidated Adjusted EBITDA
Consolidated Adjusted EBITDA Consolidated Adjusted EBITDA for the quarter of $223.3 million u General and administrative expenses increased as a percent of consolidated revenue due to expenses associated with the Company’s rebranding and name change. % of % of Q1 Consolidated Q1 Consolidated ($milli
Slide 12: Earnings per Share - As Reported
Earnings per Share - As Reported Q1 (In Millions, Except Per Share Data) 2018 2017 u The increase in EPS for Q1 2018 Consolidated Adjusted EBITDA $ 223.3 $ 200.8 resulted primarily from increased Depreciation and amortization (45.9) (45.2) Adjusted EBITDA and a lower Interest expense and amortizatio
Slide 13: Adjusted Earnings per Share
Adjusted Earnings per Share(4) Q1 2018 2017 Earnings per share, as reported $ 0.85 $ 0.70 Adjustments, net of tax: Mark-to-market adjustment for stock appreciation rights(2) 0.08 0.02 Transaction costs 0.01 — Income tax adjustments — (0.03) Adjusted earnings per share* $ 0.93 $ 0.70 Adjusted earning
Slide 14: 2018 Adjusted Free Cash Flow
2018 Adjusted Free Cash Flow(5) $12.7 $3.2 $22.5 ($1.8) ($13.9) $170.2 $147.5 Adjusted Free Cash Adjusted Working Capital Cash Interest Cash Tax Maintenance Adjusted Free Cash Flow 3 Mos. 2017 EBITDA and Other Expense Payments, Capital Expenditures Flow 3 Mos. 2018 Net of Refunds u Adjusted free cas
Slide 15: Updated Guidance
Updated Guidance Previous 2018 Full-Year Updated 2018 Full-Year Guidance Guidance Net Operating Revenues* Net Operating Revenues* $4,080 million to $4,190 million $4,110 million to $4,210 million Adjusted EBITDA(6) Adjusted EBITDA(6) $830 million to $850 million $845 million to $865 million Adjusted
Slide 16: 2018 Guidance Considerations
2018 Guidance Considerations Inpatient Rehabilitation Home Health and Hospice u Estimated 0.8% increase in Medicare pricing u Estimated 0.5% net Medicare pricing before reserves related to bad debt for Q1 reduction before reserves related to bad through Q3; ~1.25% for Q4 debt for CY 2018 u Salary in
Slide 17: Adjusted Free Cash Flow Assumptions
Adjusted Free Cash Flow(5) Assumptions 3 Months Certain Cash Flow Items 2018 2017 2018 (millions) Assumptions Actual Actual • Cash interest expense (net of amortization of debt $34.6 $140 to $150 $145.7 discounts and fees) u Increased cash payments for taxes in 2018 primarily due to exhaustion of fe
Slide 18: Uses of Free Cash Flow
Uses of Free Cash Flow 3 Months 2018 2018 2017 Actuals Assumptions Actuals IRF bed expansions $5.1 $30 to $40 $25.5 New IRFs - De novos 18.5 80 to 110 75.2 Growth in - Acquisitions — opportunistic 10.9 Core - Replacement IRFs and other 3.3 40 to 50 9.7 Business Home health and hospice acquisitions (
Slide 19: Appendix
Appendix
Slide 20: Encompass Health: Leading Provider of Inpatient Rehabilitation and Home-Based Care
Encompass Health Aand Leading Provider of Inpatient Rehabilitation Home-Based Care Market Overlap ~60% of EHC’s IRFs have an EHC home health location within an approximate 30-mile radius.* Portfolio as of March 31, 2018 Inpatient Rehabilitation Hospitals (“IRFs”) Home Health Locations Hospice Locati
Slide 21: 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, under programs designated as “widespread probes,” net operating revenues upon notice from a MAC a claim is under review. certain Medicar
Slide 22: Expansion Activity
Expansion Activity Inpatient Rehabilitation Facilities 8 Previously Announced 2 New States IRF Development # of New Beds Projects Underway* 2018 2019 2020 Q1 2018 expansion activity highlights: De Novo: u Announced formation of joint venture with Saint 1 Shelby County, AL* 34 — — Alphonsus to build
Slide 23: Rebranding and Name Change
Rebranding and Name Change u The Company’s rebranding and name change reinforce its existing strategy and position as an integrated provider of inpatient and home-based care. Effective January 1, 2018, HealthSouth Corporation changed its name to Encompass Health Corporation, with a corresponding t
Slide 24: Impact of the New Revenue Recognition Accounting Standard
Impact of the New Revenue Recognition Accounting Standard u During the first quarter of 2018, Encompass Health adopted a new accounting standard (ASC 606 - Revenue from Contracts with Customers) which clarifies the standard for recognizing revenue. u The primary impact to the Company’s financial rep
Slide 25: Business Outlook: 2018 to 2020
Business Outlook: 2018 to 2020 2018 2019 2020 • Implement rebranding and name change • Enhance clinical collaboration between the Company’s IRFs and home health locations Key • Develop and implement post-acute patient navigation tools (e.g., Post-Acute Operational Innovation Center) Initiatives • Re
Slide 26: Business Outlook 2018 to 2020: Revenue Assumptions
Business Outlook 2018 to 2020: Revenue Assumptions Inpatient Rehabilitation* Home Health* Volume (Includes New Stores) 3+% annual discharge growth 10+% annual admission growth Approx. 74% of Revenue Approx. 86% of Revenue Medicare Pricing FY 2018 FY 2019 FY 2020 CY 2018 CY 2019 CY 2020 Q418-Q319 Q41
Slide 27: Business Outlook 2018 to 2020: Labor and Other Expense Assumptions
Business Outlook 2018 to 2020: Labor and Other Expense Assumptions Inpatient Rehabilitation Home Health and Hospice Salaries and Benefits 2018 2019 2020 Salary increases 2.75-3.25% 2.75-3.25% 2.75-3.25% Benefit costs increases 8-12%* 5-10% 5-10% % of Salaries and Benefits Salaries Salaries Salaries
Slide 28: Debt Schedule
Debt Schedule Change in March 31, December 31, Debt vs. ($millions) 2018 2017 YE 2017 Advances under $700 million revolving credit facility, September 2022 - LIBOR +150bps $ 95.0 $ 95.0 $ — Term loan facility, September 2022 - LIBOR +150bps 291.0 294.7 (3.7) Bonds Payable: 5.125% Senior Notes due 20
Slide 29: Debt Maturity Profile - Face Value
Debt Maturity Profile - Face Value As of March 31, 2018* Callable beginning September 2020 ($ in millions) Callable beginning November 2017 $568 Available $1,200 Callable beginning Senior March 2018 Notes 5.75% $95 Drawn + Revolver $37 reserved Capacity for LC’s $300 Senior $350 Senior $291 Term Loa
Slide 30: Overview of Rollover Shares Held by Home Health and Hospice Management Team
Overview of Rollover Shares 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-acquisition en
Slide 31: New-Store/Same-Store Growth Inpatient Rehabilitation
New-Store/Same-Store Growth Inpatient Rehabilitation Reliant (857 beds) 25.0 Franklin, TN (40 beds) Bryan, TX (49 beds) Broken Arrow, OK (22 beds) Pearland, TX 20.0 Hot Springs, AR (27 beds) (40 beds) Gulfport, MS (33 beds) 15.0 Lexington, KY (158 beds) Westerville, OH (60 beds) Savannah, GA (50 bed
Slide 32: New-Store/Same-Store Growth Home Health
New-Store/Same-Store Growth Home Health Acquired CareSouth 70.0 (44 home health agencies in 7 states) in November 2015 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Admissions Q1 Q1 2016 2016 Q2 Q2 2016 2016 Q3 Q3 2016 2016 Q4 Q4 2016 2016 Q1 Q1 2017 2017 Q2 Q2 2017 2017 Q3 Q3 2017 2017 Q4 Q4 2017 2017 Q1 Q1201
Slide 33: Payment Sources (Percent of Revenues)
Payment Sources (Percent of Revenues) Inpatient Home Health and Rehabilitation Consolidated Hospice Segment Segment Q1 Q1 Q1 Full Year 2018 2017 2018 2017 2018 2017 2017 Medicare 74.4% 73.7% 86.1% 85.0% 76.6% 75.8% 76.0% Medicare Advantage 8.6% 8.3% 9.7% 10.2% 8.8% 8.7% 8.6% Managed care 10.1% 10.9%
Slide 34: Inpatient Rehabilitation Operational and Labor Metrics
Inpatient Rehabilitation Operational and Labor Metrics Q1 Q4 Q3 Q2 Q1 Full Year 2018 2017 2017 2017 2017 2017 (In Millions) Net patient revenue-inpatient $ 817.1 $ 776.9 $ 758.2 $ 751.5 $ 752.7 $ 3,039.3 Net patient revenue-outpatient and other revenues 23.2 25.6 25.2 26.1 25.1 102.0 Net operating r
Slide 35: Home Health and Hospice Operational Metrics
Home Health and Hospice Operational Metrics Q1 Q4 Q3 Q2 Q1 Full Year 2018 2017 2017 2017 2017 2017 (In Millions) Net home health revenue $ 185.2 $ 185.9 $ 179.3 $ 171.8 $ 163.7 $ 700.7 Net hospice and other revenue 20.5 20.3 19.0 17.0 15.6 71.9 Net operating revenues* $ 205.7 $ 206.2 $ 198.3 $ 188.8
Slide 36: Share Information
Share Information Weighted Average for the Period Q1 Full Year 2018 2017 2017 2016 2015 Basic shares outstanding(7) 97.8 88.8 93.7 89.1 89.4 Convertible perpetual preferred stock(19) — — — — 1.0 Convertible senior subordinated notes(7) — 8.6 4.0 8.5 8.3 Restricted stock awards, dilutive stock option
Slide 37: Segment Operating Results
Segment Operating Results Q1 2018 Q1 2017 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 840.3 $ 205.7 $ — $ 1,046.0 $ 777.8 $ 179.3 $ — $ 957.1 Operating Expenses: Inpatient Rehabilitation: Salaries and be
Slide 38: Segment Operating Results
Segment Operating Results Year Ended December 31, 2017 Home Health and (In Millions) IRF Hospice Reclasses Consolidated Net operating revenues $ 3,141.3 $ 772.6 $ — $ 3,913.9 Operating Expenses: Inpatient Rehabilitation: Salaries and benefits (1,603.8) — (550.8) (2,154.6) Other operating expenses(a)
Slide 39: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA(6) 2018 Q1 (in millions, except per share data) Total Per Share Net Income $ 105.2 Loss from disc ops, net of tax, attributable to Encompass Health 0.5 Net income attributable to noncontrolling interests (21.4) Income from continuing operations attribu
Slide 40: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA(6) 2017 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 $ 84.4 $ 79.4 $ 85.1 $ 86.5 $ 335.4 Loss (income) from disc ops, net of tax, attributable to E
Slide 41: Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA
Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q1 Full Year (In Millions) 2018 2017 2017 Net cash provided by operating activities $ 216.3 $ 180.8 $ 658.3 Interest expense and amortization of debt discounts and fees 35.6 41.3 154.4 Equity in net income of nonconsolidated aff
Slide 42: 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 Year Ended March 31, December 31, 2018 2017 2017 (In Millions) Total segment Adjusted EBITDA $ 257.3 $ 229.3 $ 947.1 General and administrative expenses (61.1) (36.5) (171.7) D
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(5) Q1 Full Year (In Millions) 2018 2017 2017 Net cash provided by operating activities $ 216.3 $ 180.8 $ 658.3 Impact of discontinued operations 0.7 0.4 0.6 Net cash provided by operating activities of continuing
Slide 44: Adjusted EPS - Q1 2018
Adjusted EPS(4) - Q1 2018 For the Three Months Ended March 31, 2018 Adjustments Mark-to-Market Change in Adjustment for Fair Market Stock Value of As Compensation Income Tax Transaction Equity As Reported Expense Adjustments Costs Securities(1) Adjusted (In Millions, Except Per Share Amounts) Adjust
Slide 45: Adjusted EPS - Q1 2017
Adjusted EPS(4) - Q1 2017 For the Three Months Ended March 31, 2017 Adjustments Mark-to- Market Adjustment on Stock As Compensation Income Tax As Reported Expense Adjustments Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 200.8 $ — $ — $ 200.8 Depreciation and amortization (45.2)
Slide 46: End Notes
End Notes (1) During the first quarter of 2018, the Company adopted Accounting Standards Update No. 2016-01, “Financial Instruments - Overall (Topic 825): Recognition and Measurement of Financial Assets and Liabilities,” and began recognizing mark-to-market gains and losses associated with available
Slide 47: End Notes, con't.
End Notes, con’t. (8) On July 21, 2016, the board of directors approved a $0.01 per share, or 4.3%, increase to the quarterly cash dividend on the Company’s common stock, bringing the quarterly cash dividend to $0.24 per common share. On July 20, 2017, the board of directors approved a $0.01 per sha