Encompass Health Corporation

Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience. Music THE END Oh, my God. THE END Good morning, everyone, and welcome to Encompass Health's first quarter 2021 earnings conference call. At this time, I would like to inform all participants that their lines will be in a listen-only mode. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, please press star 1 on your telephone keypad. You'll be limited to one question and one follow-up question. Today's conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Chrissy Carlisle, Encompass Health's Chief Investor Relations Officer.

Thank you, Operator, and good morning, everyone. Thank you for joining Encompass Health's first quarter 2021 earnings call. With me on the call today are Mark Tarr, President and Chief Executive Officer, Doug Coulthart, Chief Financial Officer, Barb Jacobsmeyer, President, Inpatient Rehabilitation Hospital, April Anthony, Chief Executive Officer of Encompass Home Health and Hospice, and Patrick Darby, General Counsel and Corporate Secretary. Before we begin, if you do not already have a copy, the first quarter earnings relief, supplemental information, and related form 8-K filed with the SEC are available on our website at encompasshealth.com. On page two of the supplemental information, you will find the safe harbor statements, which are also set forth in greater detail on the risk and uncertainties, many of which are beyond our control. Certain risk and uncertainties, like those relating to our ongoing strategic review and its impact on our business and stockholder value, as well as the magnitude and impact of COVID-19, that could cause actual results to differ materially from our projections, estimates, and expectations are discussed in the company's SEC filings, including the earnings release and related Form 8-K, the Form 10-K for the year ended December 31, 2020, and the Form 10-Q for the quarter ended March 31, 2021, when filed. We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance, and other forward-looking information presented, which are based on current estimates of future events and speak only as of today. We do not undertake a duty to update these forward-looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information. and at the end of earnings release, and as part of the form 8K filed yesterday with the SEC, all of which are available on our website. I would like to remind everyone that we will adhere to the one question and one follow-up question rule to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. With that, I'll turn the call over to Mark.

Good morning, everyone, and thank you, Christy. we're off to an encouraging start in 2021. Compared to the first quarter of 2020, consolidated revenue is up 4.1 percent, consolidated adjusted EBITDA is up 10 percent, and adjusted EPS is up 20.7 percent. And we've increased our full-year 2021 guidance. Our first quarter performance was characterized by promising volume trends that are contributing to solid revenue and EBITDA growth. Our future growth is supported by attractive business development pipelines across all of our service lines. We're also seeing continued strength in Medicare Advantage discharges for our IRF segment, and we are encouraged by the strong start to the UnitedHealthcare national contract in home health. Now I'd like to take a moment to recognize our incredible employees. I continue to be in awe of how they respond to meet the needs of our patients and business partners despite the external noise in the world. The stories of their compassion and the positive impact they have had on patients are truly moving, and I'm grateful for such wonderful staff who help us put the patient experience at the center of all we do. Let's turn now to our segments. In our inpatient rehabilitation segment, net operating revenues grew 5.6%, adjusted EBITDA increased 9%, and volumes continued to improve. Our average daily census was generally above fourth quarter 2020 levels throughout the first quarter, and we saw the return to discharge growth in March. For the second quarter of 2021, we expect to report strong discharge growth since volumes were most significantly impacted by COVID in the second quarter of 2020. In addition, with the continued rollout of the vaccine, we have fewer hospitals experiencing census caps due to staffing constraints related to quarantines. We're beginning to see the return of elective procedures in many of our markets. However, We believe our patients, elderly patients with complex medical conditions, are not choosing to go first. Our numbers show this. We treated approximately 1600 fewer orthopedic and lower extremity joint replacement patients in the first quarter of 2021 than we did in the first quarter of 2020. If we add back the 1600 lost discharges our total discharge growth for the first quarter would have been 2.2%. We look forward to the full return of elective procedures as our patients' confidence in the safety of the healthcare system grows, and we believe elective surgeries for our patients will improve in the back half of the year. I also want to acknowledge the tremendous job our hospital teams continue to do in managing our labor costs. For the first quarter of 2021, our employees per occupied bed, which we use as a metric to measure our efficiency, was 3.31 compared to 3.38 in the first quarter of 2020 and 3.46 in the fourth quarter of 2020. Our technology and real-time data, combined with our clinical know-how, continue to make us a best-in-class operator. The aging demographic continues to drive increased demand for our services, and we're investing to meet that demand. During the first quarter of 2021, we opened our new 40-bed inpatient rehabilitation hospital in San Angelo, Texas, and we added 15 beds to our existing hospital in Fort Worth, Texas. In April, we opened our new 50-bed hospital in North Tampa, Florida. We plan to open six additional hospitals in 2021 and add over 100 more beds to existing hospitals. For 2022, we plan to open at least 12 new hospitals, and we already have three new hospitals announced for 2023. This development pipeline is strong, and we expect more growth-related announcements throughout 2021. Our growth efforts also include continued dialogue with Medicare Advantage payers on our value proposition. During the first quarter of 2021, we continued to see evidence that our market-by-market efforts with local and regional MA directors are paying off, with same-store Medicare Advantage discharges increasing 34%. We're also maintaining our focus on the continued development and implementation of post-acute solutions. We expect to begin piloting our falls prevention model in May as part of our ongoing efforts to produce better outcomes for patients and lower the total cost of care. Leveraging data from our electronic medical record system, our goal is to reduce falls, optimize the quality of care, and reduce overall patient risk inside our rehabilitation hospitals. In regards to regulatory updates, on April 7, CMS released its notice of proposed rulemaking for inpatient rehabilitation facilities for fiscal year 2022. The proposed rule focuses on routine updates and minor technical changes and is consistent with our prior guidance. It includes a net market basket update of 2.2%. There was no discussion of or reference to a review choice demonstration program for IRFs in the proposal. In our home health and hospice segment, we grew adjusted EBITDA by $9.8 million, or 23.9%. Our margins, which were 380 basis points higher than Q1 of 2020 benefited from continued lower cost per visit and the suspension of sequestration. While limitations on electric procedures and facility access restrictions continue to limit our volume growth, we have a lot to be positive about in regards to the volumes we saw in the first quarter of 2021 and how we exited the quarter. Non-Medicare admissions were at an all-time high in March 2021, primarily due to our new national contract with UnitedHealthcare for our home health service line. We're also very pleased with the over 3,000 new referral sources we added during the quarter. We remain confident that our traditional referral sources will return to their historic referral levels as seniors begin to return to the elective surgery market and skilled nursing facilities and senior living communities begin to recover from their depressed census levels. The combination of the return of our former market along with new referral sources we have added throughout COVID leave us very encouraged about the strong organic growth opportunities beginning in the back half of the year. Additionally, we are seeing a resumption of home health acquisition activity and have a solid pipeline of development opportunities. We recently announced a definitive agreement to acquire assets from Frontier Home Health and Hospice. This business is a $36 million revenue home health and hospice provider with nine home health and 11 hospice locations across five states. We expect to close on this transaction in the second quarter of this year. We're also pleased with the progress we're making in regards to our care planning approach and the further improvements we expect to achieve over the balance of the year associated with the use of the Metallurgy Care Module. Based upon the strong results in regards to both quality outcomes and visit efficiency, We have seen a market with high levels of metrologic adoption. We are adjusting our internal operating model to ensure greater adherence to the metrologic recommendations and its proven results. We are making these adjustments in an incremental fashion over the balance of 2021 in order to ensure the model delivers the desired balance between efficiency and outcomes. we expect to see sequential improvement in visits per episode over each of the next three quarters as this new approach is rolled out. Let's turn now to the outlook for the remainder of the year. The past 12 months have proven resiliency of our business, and as you've heard me say many times, we are confident the fundamentals of our business are intact and strong. Our full year 2021 guidance has been increased to reflect our first quarter results and the recent legislative action by Congress to extend the Medicare sequestration suspension through the end of the year. Guidance now includes the following. Consolidated net operating revenues of $5.06 billion to $5.23 billion. Consolidated adjusted EBITDA of $1 billion to $1.03 billion. and adjusted earnings per share of $3.94 to $4.16. Before I turn it over to Doug, I want to touch on the strategic alternatives review of our home health and hospice segment. The review is well underway. We are following a rigorous and disciplined process and continue to evaluate and prepare for all scenarios. including the full or partial separation of the segment through an initial public offering, spinoff, merger, sale, or other transaction. We anticipate being able to provide an update on the status of this process with our Q2 earnings report at the end of July. Until then, we will not speculate on any particular outcome or make any additional comments rather than to say we are dedicated to identifying the best path forward for our company to generate value creation for our shareholders. While we actively pursue these strategic alternatives, we will maintain our focus on operational excellence. We've had a great start to the year, and I look forward to seeing what we can accomplish in 2021 and beyond. With that, I'll turn it over to Doug.