Encompass Health Corporation Q3 FY2025 earnings call

• Revenue in Q3 increased 9.4% and adjusted EBITDA grew 11.4%, contributing to year-to-date growth. - Dedicated clinical teams delivered outstanding patient outcomes with a Q3 discharge community rate of 84.6%, discharge to acute rate of 8.6%, and discharge to SNF rate of 6%, exceeding industry averages. - Recognized as America's most awarded leader in inpatient rehabilitation for the sixth consecutive year. - Opened 3 new hospitals in Q3 and expects to open 2 more in Q4, with plans to add beds to existing hospitals. - Converted ERP system to Oracle Fusion with no significant operational disruptions. - Increased bed addition growth expectations, now expecting to add approximately 127 beds to existing hospitals in 2025 and 150 to 200 in both 2026 and 2027.

Revenue in Q3 increased 9.4% and adjusted EBITDA grew 11.4%. Year-to-date revenue growth was 10.6% and adjusted EBITDA growth was 14.5%. Q3 '25 adjusted EBITDA increased 11.4% to $300.1 million. Revenue growth was driven by a 5% increase in total discharges and a 3.3% increase in net revenue per discharge.

• Increased 2025 guidance: net operating revenue of $5.905 billion to $5.955 billion, adjusted EBITDA of $1.235 billion to $1.255 billion, and adjusted earnings per share of $5.22 to $5.37. - Increased expected bed addition growth: 127 beds added to existing hospitals in 2025, and 150 to 200 in 2026 and 2027. - Full-year adjusted free cash flow estimate increased to $730 million to $810 million.

• Regulatory developments, volume, bad debt, and cost trends could cause actual results to differ from projections. - Bugs and refinements still needed post-ERP conversion. - Potential impact of CON restrictions in key states and competition dynamics.

Q: How should we think about accelerated bed addition plans impacting volume growth going forward?

A: The bed addition plans reflect the unmet need for IRF services and the validation of the business model. De novos have been performing well, and bed additions to existing hospitals offer high return on invested capital. Occupancy has been rising, and the company will continue using de novo programs and increased bed expansions.

Q: What percent of CapEx as a percent of revenue should we model to keep discharge growth in the 6% to 8% range?

A: Growth CapEx this year at the midpoint of the estimate is about $580 million. The average cost per bed on a bed addition is roughly $800,000.

Q: Did expectations come in line with estimates in the quarter?

A: No surprises in the quarter except for retro payments and a California property assessment. Everything else was pretty much in line with expectations.

Q: Talk about satellite consolidation and its impact on volumes?

A: Satellite consolidations were one-off events, very small percentage of portfolio, not anticipating additional activity. The impact on volumes had a negative impact of approximately 35 basis points on Q3 total and same-store discharge growth.

Q: Thoughts on Medicare landscape changes and implications for business?

A: The company does well across payer spectrum. Medicare Advantage growth rates are reflected in discharge growth. A shift between Medicare Advantage and fee-for-service doesn't significantly impact the business planning.

Q: Comment on pipeline and competitive landscape?

A: There are 14 announced projects with 690 beds and an active pipeline of over 40 projects. The company can move quickly, and competition from others like Select Medical and HCA doesn't crowd them out due to high barriers to entry.

Q: ERP rollout update and efficiency gains?

A: ERP conversion to Oracle Fusion went smoothly with some bugs to fix. Enhanced efficiencies in workflows are expected but not quantified for specific ROI.

Q: Impact of Medicare Advantage mix shift on Encompass?

A: No significant change seen in pre-auth perspective, and teams are persistent in advocating for patients.

Q: Occupancy cadence next year?

A: There may be downward pressure in Q1 next year due to timing of capacity additions, but overall occupancy rates remain on an upward trajectory.

Q: Satellite consolidation impact on Q4 growth headwind and referral patterns?

A: Q4 potential headwind from satellite closures is estimated to be 25 to 30 basis points. No impact on referral patterns from negative headlines.