Enhabit, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• CMS Rules: Addressed CMS' final hospice rule (improved rate adjustment to 2.6% from proposed 2.4%) and disappointing preliminary home health rule. Highlighted concerns about proposed cuts harming the home health industry and reducing patient access.
• Segment Performances: Home health had continued execution on payer contract initiatives, with admissions up 1.3% YOY (2% normalized for closed branches) and census stabilizing. Hospice had 6 consecutive quarters of sequential census growth, with admissions and census up significantly, and de novo strategy opening locations.
• Cost Strategy: 11 branches closed/consolidated by end of Q2 2025, with additional consolidation planned. Implemented advanced visit per episode management pilot in 11 branches.
• Financial Highlights: Consolidated net service revenue grew year-over-year for the first time post-spin, with home health and hospice showing momentum. Adjusted EBITDA improved, and balance sheet deleveraging continued with $50 million in debt prepayments through Q3 2025.

Segment Performance

• Home Health: Revenue was $205.9 million, with sequential growth of $5.3 million (2.6%) but a year-over-year decrease of $4.3 million (2.0%). Volumes were up 0.5% year-over-year and 2.1% sequentially. Home health adjusted EBITDA was $39.3 million, a sequential increase of $1.0 million (2.6%). Medicare patient volumes showed a slower rate of decline. Visits per episode improved sequentially and year-over-year to 13.7.
• Hospice: Revenue totaled $60.2 million, with sequential growth of $0.9 million (1.5%) and a year-over-year growth of $9.8 million (19.4%). Hospice adjusted EBITDA was up 53.8% year-over-year, driven by double-digit volume growth and margin expansion. There was 6 consecutive quarters of sequential census growth, with total admissions up 8.7% year-over-year (10% normalized for closed branches) and census up 12.3% (10.7% same-store).

Guidance

• Full year revenue expected in the range of $1.060 billion to $1.073 billion.
• Full year adjusted EBITDA expected in the range of $104 million to $108 million.
• Full year adjusted free cash flow expected in the range of $47 million to $57 million.

Risks

• CMS proposed rules for home health and hospice that could lead to rate cuts harming the industry and reducing patient access.
• Payer disruptions, such as the recent renegotiation with a national payer causing temporary volume disruption.
• Labor market challenges impacting ability to maintain competitive wage rates and recruit/retain skilled workforce.

Question and Answer

Q: Congrats on the quarter and best wishes going forward. Can you talk about mitigating the negative impact of the proposed home nursing rule and whether operational levers can fully offset a 6.4% cut?

A: As touched on, the advanced [BPE] initiative is a primary lever. Piloting concepts in coming weeks, and if executed without impacting quality, various levers could meaningfully offset the impact once fully ramped.

Q: Color on recent payer disruption and how the new national payer contract impacts volumes and rates going forward?

A: Renegotiation led to a low double-digit increase in per visit rate. Disruption caused census drop, but now back to 76% of peak census and admissions above weekly average, with confidence to regain and grow from there.

Q: Clarification on proposed rate update reset. Is full recoupment needed with follow-on cuts?

A: Viewed as a clearing event with in-year impact of temporary proposed rule, and framework for 7-year implementation, focusing on mitigating impact and market adjustment going forward.

Q: On hospice ADC growth and longer-term deleveraging targets?

A: Hospice ADC had monthly sequential progress in Q2. Longer-term focus is on continuing to delever balance sheet before pivoting to M&A or heavier de novo investments.

Q: Color on payer contract renegotiation and future contract renewals?

A: Previously non-payer innovation contract now moved to that level. 3-year contracts, with negotiations starting a year in advance. More work upcoming next year.

Q: Fee-for-service Medicare volume pressure moderation and initiatives impact?

A: Combination of settling into normal mix and developing books of business away from high MA markets. Conversion rate strong, with some markets doing well with strategies.

Q: Color on pilot programs and success gauging?

A: Pilot with 11 branches using virtual clinicians. Estimate $5M-$8M value per 0.5 VPE reduction, with focus on freeing capacity and directing to additional patient load, to provide early observations on future calls.