Encompass Health Corporation Q2 FY2025 earnings call

• Discharge growth: Total discharges up 7.2%, same-store up 4.7%, broad-based across geographies, payers, and patient types.
• Clinical expertise: Strong in neurological conditions and stroke, with dedicated clinical teams delivering outstanding outcomes.
• Quality metrics: Discharge community rate 8.5%, discharge to acute rate 8.5%, discharge to SNF rate 5.8%, all favorable vs industry average.
• Facility expansion: Opened new hospitals in Fort Myers and Daytona Beach, with plans to open 5 additional hospitals, 4 de novos, and a freestanding satellite hospital, adding beds to existing facilities.
• Clinical protocols: State-of-the-art information systems, including IRF-specific EMR, enhance development and implementation of best-in-class clinical protocols.
• Quality sharing: Work with Joint Commission, share outcome metrics like discharge community, discharge to acute, discharge to SNF, and Net Promoter Score with stakeholders.
• AI application: Use of AI with Palantir to reduce administrative burden, improve consistency, and assist nurse liaisons in patient evaluations.

In the second quarter, revenue increased 12% to $1.46 billion and adjusted EBITDA rose 17.2% to $308.6 million. Total discharges grew 7.2%, including 4.7% in same-store. Neurological conditions saw a 12% growth and stroke 6.7%. Revenue increase was due to 7.2% discharge growth and a 4.2% rise in net revenue per discharge. Bad debt expense decreased 90 basis points to 2% in Q2.

Encompass Health raised 2025 guidance: net operating revenue $5.88 billion to $5.98 billion, adjusted EBITDA $1.22 billion to $1.25 billion, and adjusted earnings per share $5.12 to $5.34. Increased 2025 estimated spend on bed expansion by $25 million and de novo spend by $5 million. Expect 2025 adjusted free cash flow of $705 million to $795 million, favorable due to tax benefits from bonus depreciation.

• Regulatory developments: Uncertainties related to regulatory changes could materially affect results.
• Volume, bad debt, cost trends: Risks associated with volume fluctuations, bad debt, and cost trends beyond control.
• Tariffs: Potential impact on construction costs from tariffs, though not currently pronounced.

Q: Occupancy rates have increased more than 200 basis points year-over-year. Purely on single bedroom facilities, where is mature occupancy?

A: Varies across portfolio. At end of 2Q, 56% of beds private. All private room facilities stabilize north of 80% occupancy, capacity mid- to high 90s. New capacity in back half may pressure occupancy.

Q: How share quality results with stakeholders? Relevant quality areas for referral sources and JV partners?

A: Work closely with Joint Commission. Focus on discharge community, discharge to acute, discharge to SNF, and Net Promoter Score. These are prioritized by Medicare and important to referral sources and JV partners.

Q: Payer mix, managed care pricing assumption. Story around that?

A: Growth in VA Community Care Network, pays at Medicare CMG, comprises almost 18% of managed care business, driving growth and improved pricing.

Q: Leverage below 2x, should prioritize larger buybacks?

A: Top priority is capacity expansions, but excess capital may be used for share repurchases. Capital allocation focuses on capacity expansions, with tax benefits from bonus depreciation aiding cash flow.

Q: CON states relaxing, impact on de novo activity?

A: South Carolina CON subsides in 2027, North Carolina and Tennessee under discussion. Encompass has presence in South Carolina, and new states like Connecticut, Utah, Nevada being considered for expansion.

Q: Benefits expense up 18%, split in SWB spend? Driver of growth?

A: Benefits run at ~10.5-11% of SWB. Double-digit increases driven by high dollar claims, with specialty drugs like cancer treatments impacting medical claims.

Q: Same-store discharge growth, back half outlook?

A: 12 straight quarters of same-store discharge growth above 4%. New facilities in back half, but some capacity late in year. Same-store growth faces tougher comp, but nondiscretionary illnesses driving stable volumes.