Encompass Health Corp Q4 FY2024 earnings call

• Fourth quarter was a strong finish with strong financial performance, broad-based volume growth, and strategic positioning. - Focus on serving the Medicare beneficiary population, with an aging US population expected. - Benefits expense per FTE trends: 12.4% increase in 2024, with premium labor cost at $29.7 million in Q4 2024, down from $30.9 million in Q4 2023. - Preopening and ramp-up costs at $1.3 million in Q4 2024. - Favorable reserve adjustments for insurance in 2024. - Significant free cash flow generation, with 2024 full-year adjusted free cash flow at ~$690 million. - Leverage and liquidity favorable, with net leverage at year-end 2.2 times. - Medicare Advantage growth both from same-store and new markets, with potential upside. - Bed additions and construction strategies, including prefabrication efforts. - Education of marketplaces on IRF vs SNF differences.

In the fourth quarter, revenue increased 12.7%, adjusted EBITDA increased 13.6%, adjusted EPS increased 23.2%, and adjusted free cash flow increased 103.7%. Total discharge growth for the quarter was 7.8%, with same-store discharge growth at 5.8%. Medicare Advantage discharge growth in Q4 was 14.7%, up 12% year-to-date, with same-store growth for 2024 at 9.9% and a five-year CAGR of 11.6%. Medicare fee-for-service discharges were up 6.8% year-to-date, 8.6% same-store for 2024, and had a five-year CAGR of 3.4%.

2025 guidance includes net operating revenue $5.8 to $5.9 billion, adjusted EBITDA $1.16 to $1.20 billion, and adjusted earnings per share $4.67 to $4.96. Key considerations: preopening and ramp-up costs weighted to second half of 2025, Oracle Fusion implementation and NCI expenses, and variability in provider taxes.

• Regulatory developments, volume, bad debt, and cost trends could impact results. - Group medical prescription drug cost growth expected to remain elevated. - Potential tariff impacts on construction costs. - Variability in provider tax impacts on EBITDA.

Q: How is MA growth distributed across states/markets?

A: It's been a mix of same-store growth and growth from new markets, with Medicare Advantage showing upside due to enrollment trends and referral rate discrepancies.

Q: What drives the deceleration in SWB per assumption?

A: Includes total SWB inflation, benefits trends, premium labor costs, and expected turnover rate benefits.

Q: Thoughts on Florida market and policy?

A: Florida has strong growth with intentional expansion, demographics support, and was previously underbedded with CON restrictions lifted.

Q: Drivers of adjusted free cash flow?

A: Better-than-expected EBITDA and favorable working capital results, with some pull forward from 2025 claims activity.

Q: Impact of nursing home market share gains?

A: Still a tailwind, with ongoing higher acuity patient treatment and ten straight quarters of same-store discharge growth above 4% indicating market share gains from SNFs or other IRFs.