Encompass Health Corporation · NYSE:EHC
Encompass Health — Q3 2018 Earnings Presentation
51 slides from Encompass Health's earnings presentation, Oct 30, 2018
Slide 1: Third Quarter 2018 Earnings Call
Third Quarter 2018 Earnings Call October 30, 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 Q3 2018 Summary ................................................................................................... 4-5 Clinical Collaboration Rate ........................................................................................ 6 Inpatient Rehabilitation Segment ..........
Slide 4: Q3 2018 Summary
Q3 2018 Summary Q3 Growth (In Millions) Q3 2018 Q3 2017 Dollars Percent Encompass Health Consolidated Net operating revenues* $ 1,067.6 $ 981.6 $ 86.0 8.8% Adjusted EBITDA $ 224.3 $ 204.6 $ 19.7 9.6% Inpatient Rehabilitation Segment Net operating revenues* $ 825.6 $ 783.5 $ 42.1 5.4% Adjusted EBITDA
Slide 5: Q3 2018 Summary (cont.)
Q3 2018 Summary (cont.) u Expansion Activity (see page 22) Began operating the existing 29-bed inpatient rehabilitation hospital located on the campus of Tidelands Waccamaw Community Hospital in Murrells Inlet, South Carolina in joint venture with Tidelands Health Opened one home health location
Slide 6: Improving 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* 28.7% 34.3% Collaboration Rate Collaboration Rate u As of September 30, 2018, Encompass Health had 77 overlap markets.* u
Slide 7: Inpatient Rehabilitation Segment - Revenue
Inpatient Rehabilitation Segment - Revenue Q3 Q3 Favorable/ ($millions) 2018 2017 (Unfavorable) Net operating revenues:* Inpatient $ 798.4 $ 758.2 5.3% Outpatient and other 27.2 25.3 7.5% Total segment revenue $ 825.6 $ 783.5 5.4% (Actual Amounts) Discharges 44,230 42,948 3.0% Same-store discharge g
Slide 8: Inpatient Rehabilitation Segment - Adjusted EBITDA
Inpatient Rehabilitation Segment - Adjusted EBITDA u Segment Adjusted EBITDA for the quarter increased 6.3% to Q3 % of Q3 % of $212.9 million. ($millions) 2018 Revenue 2017 Revenue Expense ratios were impacted Net operating revenues* $ 825.6 $ 783.5 in 2018 by the inclusion of $4.5 million of busi
Slide 9: Home Health and Hospice Segment - Revenue
Home Health and Hospice Segment - Revenue Q3 Q3 Favorable/ ($millions) 2018 2017 (Unfavorable) Net operating revenues:* Home health revenue $ 209.2 $ 180.3 16.0 % Hospice revenue 32.8 17.8 84.3 % Total segment revenue $ 242.0 $ 198.1 22.2 % Home Health Metrics (Actual Amounts) Admissions 34,364 31,4
Slide 10: Home Health and Hospice Segment - Adjusted EBITDA
Home Health and Hospice Segment - Adjusted EBITDA Q3 Q3 u Segment Adjusted EBITDA % of % of ($millions) 2018 Revenue 2017 Revenue for the quarter increased Net operating revenues* $ 242.0 $ 198.1 24.1% to $43.2 million. Included the acquisition of Camellia Healthcare on Cost of services (114.6) 47
Slide 11: Consolidated Adjusted EBITDA
Consolidated Adjusted EBITDA Consolidated Adjusted EBITDA for the quarter of $224.3 million u General and administrative expenses decreased as a percent of consolidated revenue primarily due to operating leverage resulting from revenue growth. % of % of Q3 Consolidated Q3 Consolidated ($millions) 20
Slide 12: Earnings per Share - As Reported
Earnings per Share - As Reported Q3 9 Months (In Millions, Except Per Share Data) 2018 2017 2018 2017 Consolidated Adjusted EBITDA $ 224.3 $ 204.6 $ 679.2 $ 614.9 u The increase in EPS for Q3 2018 and first Depreciation and amortization (51.2) (46.2) (146.8) (137.2) nine months of 2018 resulted prim
Slide 13: Adjusted Earnings per Share
Adjusted Earnings per Share(5) Q3 9 Months 2018 2017 2018 2017 Earnings per share, as reported $ 0.89 $ 0.67 $ 2.65 $ 2.08 Adjustments, net of tax: Mark-to-market adjustment for stock appreciation rights(3) 0.03 (0.01) 0.18 0.08 Transaction costs — — 0.01 — Change in fair market value of equity secu
Slide 14: 2018 Adjusted Free Cash Flow
2018 Adjusted Free Cash Flow(6) $64.3 $13.7 $3.2 ($20.4) ($13.2) $377.2 $424.8 Adjusted Free Cash Adjusted Working Capital Cash Interest Cash Tax Maintenance Adjusted Free Cash Flow 9 Mos. 2017 EBITDA and Other Expense Payments, Capital Expenditures Flow 9 Mos. 2018 Net of Refunds u Adjusted free ca
Slide 15: Updated Guidance
Updated Guidance Previous 2018 Full-Year Updated 2018 Full-Year Guidance Guidance Net Operating Revenues* Net Operating Revenues* $4,200 million to $4,275 million $4,250 million to $4,300 million Adjusted EBITDA(7) Adjusted EBITDA(7) $865 million to $880 million $880 million to $890 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 Q3; reduction before reserves related to bad ~1.2% for Q4 debt for Q4 2018 u Salary increase of ~3
Slide 17: Adjusted Free Cash Flow Assumptions
Adjusted Free Cash Flow(6) Assumptions 9 Months Certain Cash Flow Items 2018 2017 2018 (millions) Assumptions Actual Actual • Cash interest expense (net of amortization of debt $107.6 $140 to $150 $145.7 discounts and fees) u Increased cash payments for taxes in 2018 primarily due to exhaustion of t
Slide 18: Uses of Free Cash Flow
Uses of Free Cash Flow 9 Months 2018 2018 2017 Actuals Assumptions Actuals IRF bed expansions $15.2 $30 to $40 $25.5 New IRFs - De novos 54.5 80 to 110 75.2 Growth in - Acquisitions — opportunistic 10.9 Core - Replacement IRFs and other 13.7 40 to 50 9.7 Business Home health and hospice acquisitions
Slide 19: Appendix
Appendix
Slide 20: Encompass Health Map of Locations
Encompass Health Aand Leading Provider of Inpatient Rehabilitation Home-Based Care Market Overlap 77 of EHC’s IRFs have an EHC home health location within an approximate 30-mile radius.* Portfolio as of September 30, 2018 Inpatient Rehabilitation Hospitals (“IRFs”) Home Health Locations Hospice Loca
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 5 Previously Announced 2 New States IRF Development # of New Beds Projects Underway* 2018 2019 2020 De Novo: Shelby County, AL 34 — — Bluffton, SC (formerly known as Hilton Head, SC) 38 — — 1 Murrieta, CA — 50 — 2 Katy, TX — 40 Joint Ventures: Q
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 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 2018 FY 2019 FY 2020 CY 2018 CY 2019 CY 20
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 5-8% 6-8% 5-10% % of Salaries and Benefits Salaries Salaries Salaries ~90
Slide 28: Debt Schedule
Debt Schedule Change in September 30, December 31, Debt vs. ($millions) 2018 2017 YE 2017 Advances under $700 million revolving credit facility, September 2022 - LIBOR +150bps $ 65.0 $ 95.0 $ (30.0) Term loan facility, September 2022 - LIBOR +150bps 283.7 294.7 (11.0) Bonds Payable: 5.125% Senior No
Slide 29: Debt Maturity Profile - Face Value
Debt Maturity Profile - Face Value As of September 30, 2018* Callable beginning September 2020 ($ in millions) Callable beginning November 2017 $595 Available $1,200 Callable beginning Senior March 2018 Notes 5.75% $65 Drawn + Revolver $40 reserved Capacity for LC’s $300 Senior $350 Senior $284 Term
Slide 30: Overview of Rollover Shares Held by Home Health and Hospice Management
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) Shelby County, AL (34 beds) Bluffton, SC (38 beds) 20.0 Hot Springs, AR (27 beds) Pearland, TX 15.0 Gulfport, MS (33 beds) (40 beds) Westerville, OH (60
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 Acquired Camellia Healthcare 30.0 (14 home health agencies in 3 states) in May 2018 20.0 10.0 0.0 Admissions Q1 Q1 2016 2016 Q2 Q2 2016 2016 Q3 Q3 2016 2016 Q4 Q4 201
Slide 33: Payment Sources (Percent of Revenues)
Payment Sources (Percent of Revenues) Inpatient Home Health Rehabilitation and Hospice Consolidated Segment Segment Q3 Q3 Q3 9 Months Full Year 2018 2017 2018 2017 2018 2017 2018 2017 2017 Medicare 72.8% 73.5% 85.0% 85.8% 75.4% 76.0% 75.8% 75.8% 76.0% Medicare Advantage 9.1% 8.1% 9.4% 9.6% 9.2% 8.4%
Slide 34: Inpatient Rehabilitation Operational and Labor Metrics
Inpatient Rehabilitation Operational and Labor Metrics Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2018 2018 2018 2017 2017 2017 2017 2017 (In Millions) Net patient revenue-inpatient $ 798.4 $ 809.6 $ 817.1 $ 776.9 $ 758.2 $ 751.5 $ 752.7 $ 3,039.3 Net patient revenue-outpatient and other revenues 27.2 25.0 23.2
Slide 35: Home Health and Hospice Operational Metrics
Home Health and Hospice Operational Metrics Q3 Q2 Q1 Q4 Q3 Q2 Q1 Full Year 2018 2018 2018 2017 2017 2017 2017 2017 (In Millions) Net home health revenue $ 209.2 $ 204.8 $ 185.3 $ 186.3 $ 180.3 $ 171.9 $ 163.9 $ 702.4 Net hospice revenue 32.8 28.3 20.4 20.1 17.8 16.9 15.4 70.2 Net operating revenues*
Slide 36: Share Information
Share Information Weighted Average for the Period Q3 9 Months Full Year 2018 2017 2018 2017 2017 2016 2015 Basic shares outstanding(8) 98.0 97.8 97.9 92.3 93.7 89.1 89.4 Convertible perpetual preferred stock(20) — — — — — — 1.0 Convertible senior subordinated notes(8) — — — 5.4 4.0 8.5 8.3 Restricte
Slide 37: Segment Operating Results
Segment Operating Results Q3 2018 Q3 2017 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 825.6 $ 242.0 $ — $ 1,067.6 $ 783.5 $ 198.1 $ — $ 981.6 Operating Expenses: Inpatient Rehabilitation: Salaries and be
Slide 38: Segment Operating Results
Segment Operating Results Nine Months Ended September 30, 2018 Nine Months Ended September 30, 2017 Home Home Health and Health and (In Millions) IRF Hospice Reclasses Consolidated IRF Hospice Reclasses Consolidated Net operating revenues $ 2,500.5 $ 680.8 $ — $ 3,181.3 $ 2,338.9 $ 566.2 $ — $ 2,905
Slide 39: 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 40: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA(7) 2018 Q1 Q2 Q3 9 Months (in millions, except per share data) Total Per Share Total Per Share Total Per Share Total Per Share Net Income $ 105.2 $ 113.2 $ 109.3 $ 327.7 Loss (income) from disc ops, net of tax, attributable to Encompass Health 0.5 (0.2
Slide 41: Reconciliation of Net Income to Adjusted EBITDA
Reconciliation of Net Income to Adjusted EBITDA(7) 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 42: Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA
Net Cash Provided by Operating Activities Reconciled to Adjusted EBITDA Q3 9 Months Full Year (In Millions) 2018 2017 2018 2017 2017 Net cash provided by operating activities $ 198.5 $ 174.9 $ 584.0 $ 506.9 $ 658.3 Interest expense and amortization of debt discounts and fees 37.3 36.8 110.6 118.5 15
Slide 43: 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 Nine Months Ended Year Ended September 30, September 30, December 31, 2018 2017 2018 2017 2017 (In Millions) Total segment Adjusted EBITDA $ 256.1 $ 235.1 $ 778.5 $ 705.6 $ 947
Slide 44: Reconciliation of Operating Cash Flow to Adjusted Free Cash Flow
Reconciliation of Net Cash Provided by Operating Activities to Adjusted Free Cash Flow(6) Q3 9 Months Full Year (In Millions) 2018 2017 2018 2017 2017 Net cash provided by operating activities $ 198.5 $ 174.9 $ 584.0 $ 506.9 $ 658.3 Impact of discontinued operations 0.1 0.1 0.7 0.7 0.6 Net cash prov
Slide 45: Adjusted EPS - Q3 2018
Adjusted EPS(5) - Q3 2018 For the Three Months Ended September 30, 2018 Adjustments Mark-to-Market Change in Adjustment for Fair Market Stock Value of As Compensation Income Tax Equity As Reported Expense Adjustments Securities(2) Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 22
Slide 46: Adjusted EPS - Q3 2017
Adjusted EPS(5) - Q3 2017 For the Three Months Ended September 30, 2017 Adjustments Mark-to- Market Adjustment on Stock Loss on Early As Compensation Extinguishment Income Tax As Reported Expense of Debt Adjustments Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 204.6 $ — $ — $ —
Slide 47: Adjusted EPS - YTD 2018
Adjusted EPS(5) - YTD 2018 For the Nine Months Ended September 30, 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(2) Adjusted (In Millions, Except Per Share Amounts) Ad
Slide 48: Adjusted EPS - YTD 2017
Adjusted EPS(5) - YTD 2017 For the Nine Months Ended September 30, 2017 Adjustments Mark-to-Market Adjustment for Stock Loss on Early As Compensation Extinguishment Income Tax As Reported Expense of Debt Adjustments Adjusted (In Millions, Except Per Share Amounts) Adjusted EBITDA $ 614.9 $ — $ — $ —
Slide 49: End Notes
End Notes (1) On October 28, 2013, the Company announced its board of directors authorized the repurchase of up to $200 million of its common stock. On February 14, 2014, the Company's board approved an increase in this common stock repurchase authorization from $200 million to $250 million. As of J
Slide 50: End Notes, con't.
End Notes, con’t. (8) In November 2013, the Company closed separate, privately negotiated exchanges in which it issued $320 million of 2.0% Convertible Senior Subordinated Notes due 2043 in exchange for 257,110 shares of its 6.5% Series A Convertible Perpetual Preferred Stock. The Company recorded ~
Slide 51: End Notes, con't.
End Notes, con’t. (16) Full-time equivalents included in the table represent Encompass Health employees who participate in or support the operations of our hospitals and include an estimate of full-time equivalents related to contract labor. (17) Employees per occupied bed, or “EPOB,” is calculated