Encompass Health Corporation

Good morning, everyone, and welcome to the Encompass Health's third 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'll 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 Mark Miller, Encompass Health's Chief Investor Relations Officer.

Thank you, Operator, and good morning, everyone. Thank you for joining Encompass Health's third quarter 2021 earnings call. With me on the call today are Mark Tarr, President and Chief Executive Officer, Doug Coltharp, Chief Financial Officer, Bob Jacobsmeyer, Chief Executive Officer, Home Health and Hospice, and Patrick Darby, General Counsel and Corporate Secretary. Before we begin, if you do not already have a copy, the third quarter earnings release, supplemental information, and related form 8K 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 last page of the earnings release. During the call, we will make forward-looking statements which are subject to risks and uncertainties, many of which are beyond our control. Certain risks 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 , the Form 10 for year ended December 31, 2020, and the Form 10 for the quarters ended March 31, 2021, June 30, 2021, and September 30, 2021, when filed. We encourage you to read them. Your caution 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 supplemental information at the end of the earnings release and as part of the 8-K 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 Tarr.

Thank you, Mark. Good morning, everyone. When we last spoke to you in conjunction with our Q2 earnings report in late July, we pointed to accelerating momentum in both business segments and the expectation that favorable operating trends would continue through the second half of this year. Based on that expectation and our strong performance through the first half of the year, we increased our 2021 guidance for the second time this year. In August, it became increasingly evident that the COVID surge which at that time was disproportionately impacting the Southeast and Texas was creating challenges, particularly for our home health and hospice business. We believe these headwinds are largely transient and that we have passed the peak impact and we have taken and continue to take actions across our organization to mitigate these challenges. Nonetheless, These challenges will remain with us to some degree in the near term, and so accordingly, we have revised our 2021 guidance down. Nothing related to these prevailing headwinds does anything to dampen our enthusiasm for the long-term prospects of the businesses we operate and for our competitive position in the industry. To the contrary, these circumstances only underscore the growing demand for the services we provide, and the paramount importance of producing high-quality patient outcomes in a cost-effective manner. I'm going to speak more about current operating trends and the actions we're taking in a moment. But first, I'd like to update you on the strategic alternatives review for our home health and hospice business. As we stated in our press release last evening, we expect to affect the partial or full separation of our home health and hospice business into an independent public company via a carve-out IPO, spinoff, or split-off. We are targeting such a transaction in the first half of 2022 and expect to announce a more precise timing in the form of the separation transaction in connection with our fourth quarter earnings release. While there can be no assurance that a transaction of this nature will be consummated, we have made specific or significant progress on the various tasks necessary to complete a separation transaction and we will further our state of readiness over the balance of this year. We've also transitioned our home health and hospice business to new leadership and now have in place a team in which we have supreme confidence. As we previously stated, we believe a full or partial separation of the home health and hospice business will enhance the long-term success and value of the business. We have thoroughly evaluated a broad array of public and private transaction alternatives and further believe that effecting the separation via the formation of an independent public company is superior to the other alternatives considered. Among other considerations, this belief is based on the anticipated strategic focus, future growth and value creating opportunities, execution risk, and tax efficiency resulting from such a transaction. We understand that there is some fatigue within the investment community regarding the duration of this process. We appreciate your patience and strongly believe our review period is appropriate and common for a thorough exploration of transactions in the best interest of shareholders. We have deployed substantial resources, internal and external, to the analysis of alternatives and to the aforementioned separation preparations. And I remind you, we have undertaken this process while continuing to address the needs of a vulnerable segment of our patient population amidst the challenges of a continuing global pandemic. With that, I'm going to turn back to the quarter and operating trends. Doug will go into greater detail on key metrics during his remarks. In spite of the aforementioned COVID-related challenges, our consolidated financial results for Q3 were solid. As compared to the same period last year, Q3 consolidated revenue grew 9.4% and adjusted EBITDA grew 6.7%. Discharge volumes in our inpatient rehabilitation hospitals increased 8.7% in Q3 with 6.7% same-store growth, further underscoring the positioning of our facilities as the trusted choice for patients, providers, and payers. Although staffing issues were more pronounced in the home health and hospice business, the IRF business was not immune. During Q3, we utilized higher levels of contract labor, sign-on bonuses, and shift bonuses in order to meet the increased demand for our IRF services. These pressures on our labor costs were partially offset by improved productivity. We are continuing to expand the capacity of our IRF business to meet the rising demand for services by opening new hospitals and adding beds to existing facilities. We opened four new 40-bed inpatient rehabilitation hospitals in Q3. And earlier this week, we opened our eighth hospital for 2021, a 50-bed facility in Henry County, Georgia. We've also added 89 beds to existing facilities. Our de novo pipeline remains very strong with an anticipated 10 to 12 openings to occur in each of the next two years. Turning now to home health and hospice. While the long-term value proposition of home health care services remains intact, we are currently operating in a challenging environment, primarily due to COVID surge and industry-wide labor pressures. The underlying drivers of increased home care remain unchanged. Strong and increasing patient preference for care in the home, Demographic tailwinds due to the aging of the population and cost advantages to providing care in the home rather than in other settings. Our total home health admissions decreased 0.9% in the third quarter of 2021 compared to the same period of 2020. This decrease resulted from a reduction in episodic admissions That was largely offset with the continued significant growth in non-episodic admissions, primarily due to our new contract with United Healthcare. The primary limitations on admissions growth during Q3 were the reduction in elective procedures, reduced occupancy levels and access restrictions in senior living facilities, and staffing constraints that caused us to turn away qualified referrals. In the second quarter of 2021, our episodic admissions from patients receiving elective procedures in acute care hospitals had returned to historic levels. In Q3, this trend abruptly reversed due to the COVID surge and restrictions placed on these procedures by state governments and local healthcare systems. As compared to the same period last year, our Q3 episodic admissions from patients receiving elective procedures in acute care hospitals were down approximately 400 admissions. Episodic admissions from patients residing in senior living facilities declined approximately 1,100 compared to the prior year. Demand for home care has remained strong. In Q3, we estimate that we lost approximately 2,500 admissions due to staffing constraints. The constraints are resulting from the combination of quarantined employees due to COVID exposures and industry-wide staffing shortages. We, along with other industry players, are responding to staffing constraints by increasing the use of higher cost contract labor and paying higher salaries and wages to existing staff and new hires, including sign-on bonuses. We also encouraged our employees company-wide to get COVID vaccinations and have seen a meaningful increase in employee vaccination rates over the past several months. Currently, 74% of our inpatient rehabilitation hospital based employees and 61% of our home health and hospice location based employees are fully or partially vaccinated. We're pleased with the progress we're making in addressing staffing constraints. During the third quarter of 2021, the number of our home health locations with staffing limitations decreased from a high of 85 to a low of 62 as the quarter closed. Currently, we have 50 home health locations with staffing limitations. We're also pleased with the progress we're making in regards to hiring of nurses. We hired 435 full-time nurses in the third quarter of 2021 compared to 306 in the third quarter of 2020, an increase of 42%. While we're making progress, these labor pressures are not expected to abate in the near term, and it takes time to onboard staff. On average, it takes 60 days before a new full-time clinician is operating at expected productivity levels which results in higher cost per visit due to a decrease in productivity. It may take several quarters before we reach a point where we return to historic productivity levels given our need to recruit and onboard staff. Finally, we are seeing some encouraging signs thus far in Q4. Our average home health admissions per day are up 14, and the number of quarantine field employees has dropped from 155 in September to 109 in October. Now I'll turn it over to Doug to provide more detail on the quarter and to outline our revised guidance and the key underlying assumptions.