Encompass Health Corp Q3 FY2024 earnings call

• Q3 was a strong quarter with 11.9% revenue increase and 13.4% adjusted EBITDA increase. Total discharges up 8.8% including 6.8% same-store. - Neurological and stroke conditions saw growth. Medicare and Medicare Advantage discharges increased. - Added 99 beds in Q3, with plans for more de novo hospitals, including a fully prefabricated one in Houston. - Addressed hurricane impacts, with hospitals resuming normal operations, and minor damage to 25 hospitals. - RCD program details: Cycle 1 affirmation rate 89%, Cycle 2 ongoing with higher required rate, appealing non-affirmations. - SWB per FTE increased, labor costs stable, significant free cash flow generated.

Q3 total revenue was $1.35 billion, up 11.9%, and adjusted EBITDA was $269.3 million, up 13.4%. Total discharges increased 8.8%, including 6.8% in same-store. Neurological and stroke, the two most common primary conditions treated, grew 9% and 9.7% respectively. Medicare discharges increased 8.8% for the quarter, while Medicare Advantage discharges grew 12.6%. Revenue contribution from different segments was broad-based across geographies, payers, and patient types.

• Increased 2024 guidance. Now expects full-year adjusted free cash flow of $560 million to $620 million. - Net operating revenue expected $5.325 billion to $5.375 billion, adjusted EBITDA $1.07 billion to $1.09 billion, adjusted earnings per share $4.19 to $4.33. - Accounted for hurricane impacts on volumes, length of stay, and facility repairs in updated guidance.

• Hurricane impacts on communities may affect volumes and length of stay in Q4. - Regulatory risks related to RCD affirmation rates, with non-affirmations based on improper standards conflicting with Medicare coverage criteria.

Q: What drove same-store volume strength and bed addition impact?

A: Broad geographic growth, strong stroke and neurological categories, ramp-up of past couple years' facilities and bed additions.

Q: Outlook for FTEs and wage inflation?

A: FTE growth correlated to discharge growth, SWB per FTE up 3.5% consistent with prior quarters, EPOB at conducive level.

Q: Revenue impact from hurricanes in Q4?

A: Minor impact as hospitals resumed normal operations quickly, evaluating community system impacts.

Q: Bad debt reserve guidance?

A: Normalized level, Q3 benefited from aging-based reserve decrease and processed denied claims.

Q: Key headwinds and tailwinds for 2025?

A: SWB per FTE inflation 3%-3.5%, pre-opening costs, provider tax visibility issues.

Q: Prefab construction efficiencies?

A: Houston prefab took ~5 months vs conventional 11-12 months, Athens expected faster, cost savings potential on future projects.

Q: Election implications for hospitals?

A: No significant threat seen, net provider tax exposure limited in Tennessee.

Q: Leverage target?

A: No specific target, comfortable with current range, priority on capacity expansions.