• Revenue: Increased 11.9% to $1.35 billion.
• Adjusted EBITDA: Increased 13.4% to $269.3 million.
• Total Discharges: Increased 8.8%.
• Net Revenue per Discharge: Increased 2.5%.
• Bad Debt Expense: 1.9% of revenue, down 30 basis points from Q3 '23.
• SWB per FTE: Increased 4.1%, with salaries and wages per FTE up 3.5% and benefits per FTE up 14%.
• Premium Labor Expense: $32.6 million, down 2% from Q3 '23.
• Adjusted Free Cash Flow: Increased 27.1% to $189.7 million.
• Net Leverage: 2.3 times at quarter end.
• Unrestricted Cash: Approximately $148 million.
• 2024 Guidance: Net operating revenue of $5.325 billion to $5.375 billion, adjusted EBITDA of $1.07 billion to $1.09 billion, and adjusted EPS of $4.19 to $4.33.

• Warning! GuruFocus has detected 3 Warning Sign with BP.

Release Date: October 29, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Encompass Health Corp (NYSE:EHC) reported a strong third quarter with an 11.9% increase in revenue and a 13.4% rise in adjusted EBITDA.
• Total discharges increased by 8.8%, with same-store discharges up by 6.8%, indicating broad-based growth across geographies and payer types.
• The company successfully added 99 beds during the quarter, including two new hospitals and expansions at existing facilities, supporting future growth.
• Encompass Health Corp (NYSE:EHC) is investing in prefabricated hospital construction, which is expected to lower costs and reduce construction times.
• The company raised its 2024 guidance, reflecting confidence in continued strong performance and demand for inpatient rehabilitation services.

Negative Points

• The company faced challenges with the Review Choice Demonstration (RCD) program, with some hospitals not meeting the required affirmation rate, leading to continued 100% prepayment claim reviews.
• Hurricane impacts in the Southeast and Mid-Atlantic regions caused temporary hospital closures and could affect Q4 volumes and length of stay.
• Group medical costs increased significantly, driven by large claims and higher prescription costs, impacting benefits expenses.
• Despite strong discharge growth, the company anticipates potential disruptions in healthcare systems in hurricane-affected communities, which may impact Q4 results.
• The company is still gathering estimates for hurricane-related repairs, which are expected to incur expenses of less than $1 million in Q4.

Q & A Highlights

Q: What drove the strong same-store volume growth in the third quarter, and how much of this was due to the addition of new beds? A: Mark Tarr, President and CEO, explained that the growth was broad across geographies and categories, such as stroke and neurological conditions. The ramp-up of facilities opened in the past couple of years also contributed. The addition of 115 beds year-to-date, including 40 in satellite locations, provided a tailwind to same-store numbers.

Q: Should we expect the increase in total FTEs to continue at the current rate to keep up with discharge growth, and what is the outlook for wage inflation? A: Douglas Coltharp, CFO, noted that SW per FTE increased by 3.5%, consistent with previous quarters. Total FTE growth is expected to correlate with discharge growth. The EPOB level is conducive to retaining staff and producing strong outcomes, with turnover rates for RNs and therapists at 20.7% and 7.6%, respectively.

Q: Can you provide an estimate for the revenue impact in the fourth quarter due to the hurricanes? A: Mark Tarr stated that the impact on discharge growth and revenue from the hurricanes was minor, as operations resumed quickly. The updated guidance for revenue and adjusted EBITDA incorporates any potential impacts from the hurricanes, including volume, length of stay, and facility repairs.

Q: What are the key headwinds and tailwinds for 2025, and any modeling considerations for analysts and investors? A: Douglas Coltharp mentioned that SWB per FTE inflation is expected to be in the 3% to 3.5% range. Preopening and ramp-up costs are likely to be similar to this year. The favorable EBITDA impact from net provider taxes this year may not fully repeat in 2025, with $4 million to $5 million of the $13 million being out of period.

Q: How is the prefabrication strategy impacting construction costs and timelines? A: Douglas Coltharp highlighted that the Houston project, the first fully prefabricated facility, demonstrated a significant reduction in construction time, from 11-12 months to about five months. While initial costs were breakeven with conventional construction, future projects are expected to achieve a 15% cost savings.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.