Encompass Health Corporation

Good morning, everyone, and welcome to Encompass Health's fourth 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 will 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 Chief Investor Relations Officer.

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's fourth quarter 2021 earnings call. With me on the call today are Mark Tarr, President and Chief Executive Officer, Doug Coltharp, Chief Financial Officer, Barb 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 fourth quarter earnings release, 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 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 the spinoff of our home health and hospice business and its impact on our business and stockholder value, as well as the ongoing effects of the pandemic, 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 8K and Form 10K for the year-ended December 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, at the end of the 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 Tarr.

Thank you, Mark, and good morning, everyone. 2021 brought both continued and new challenges to healthcare providers. Our hospital and home care teams have consistently provided high-quality, compassionate care to patients in need of our services throughout the pandemic. The dedication of our team members allowed us to make significant operational and strategic progress and to generate strong financial results in spite of these challenges. We remain confident in the future prospects of each of our businesses and continue to enhance the positioning of each to capitalize on growth opportunities ahead. Starting with a recap of our financial results, on a consolidated basis for fiscal year 2021, we generated 10.3% revenue growth and 19.5% adjusted EBITDA growth, surpassing the $1 billion milestone in adjusted EBITDA for the first time in our company's history. Both businesses contributed to the growth in adjusted EBITDA, with the earth segment increasing 16.3% and the home health and hospice increasing 29.5%. We continue to invest in capacity expansions across our service lines. In 2021, we opened eight de novo IRFs and added 117 beds to existing hospitals, increasing our licensed bed count by 4.4%. We also closed on approximately $102 million of home health and hospice acquisitions and opened three de novo locations. In 2022, We plan to open 10 de novo IRFs and add more than 100 beds to existing hospitals. We'll continue to pursue home health and hospice acquisitions and currently have an active pipeline of potential deals. We'll also plan to open 10 additional de novo locations. As we recently announced, we are proceeding with the spinoff of our home health and hospice business as an independent publicly traded company under the new brand identity of Inhabit Home Health and Hospice. Our board believes this will unlock significant value for the business and our shareholders. We are targeting consummation of the spinoff in the first half of 2022, and we've included additional detail on pages five through seven of the supplemental slides accompanying our Q4 earnings release. This decision comes more than a year after we first publicly announced the decision to review strategic alternatives for our home health and hospice business. The duration of the review reflects the careful and thorough process undertaken by our company to select an alternative that maximizes value. From the outset of this process, our board has been vigilant regarding its fiduciary duties and it remains committed to evaluating all reasonable means to achieve the objective of long-term value creation. The Board has considered an array of alternative strategies and structures and dynamic market environment with the advice of our financial advisors and legal counsel and with input from shareholders and taking into account various factors including execution risk, tax efficiency, and capital structure. We believe the establishment of Inhabit Home Health and Hospice as an independent company will provide a number of significant benefits, including enhanced management focus, separate capital structures, and allocation of financial resources, better alignment of management incentives, and the creation of independent equity currencies. The announcement of the spinoff and the introduction of the Inhabit brand have been received with great enthusiasm by our associates in the home health and hospice segment. Rebranding of our home health and hospice branches to inhabit will begin in April and is expected to largely be completed by the consummation of the spinoff. Now turning to Q4, our consolidated financial results for the quarter were solid and were in line with the guidance we provided on October 27th. Q4 consolidated revenues increased 8.6%, and consolidated adjusted EBITDA grew 5.3%. Beginning with the IRF segment, we experienced record-level average daily census during the quarter of 7,100 patients, leading to discharge growth of 9.6%, inclusive of 6% same-store growth. This increase in volume drove revenue growth of 11.7% for Q4. The acceleration in demand for our services in a tight market for skilled clinicians necessitated an increased utilization of sign-on and shift bonuses, as well as agency staffing. Doug will provide some commentary around IRF staffing cost trends in his remarks. Earth segment adjusted EBITDA increased 8.4% in Q4 with margin impacted by higher staffing costs. Our home health and hospice business in Q4 continued to confront the industry-wide challenges around staffing and patient flows. Those challenges notwithstanding, we made progress on key staffing initiatives and saw some green shoots related to volume growth. For the quarter, Home health and hospice revenue declined 1.8% and adjusted EBITDA decreased 5.2%. On the staffing front, we had another strong quarter with net new nursing hires adding 133 nursing FTEs in Q4 on top of the 127 new nursing FTEs who joined us in Q3. These recent hires will progress through orientation and initial ramp up and serve as a source of increased productivity in the second half of 2022. Thus far, they have served primarily to backfill for quarantined employees. We estimate a loss of at least 1,700 total home health admissions in Q4 as a result of the staffing constraints. To ensure a continued increased focus on recruiting new clinical talent and reducing turnover, Barb has added a chief human resources officer and a vice president of talent acquisition to her leadership team. These roles did not previously exist at our home health and hospice segment, and these hires round out and solidify the senior management team for this business. With regard to volume trends, our home health business had total admissions growth of 4.7%, inclusive of 2.4% same-store total admissions growth. Total starts of care, which includes admissions and recertifications, increased 1.7%, reversing a decline of 1.5% in Q3. Growth is occurring in non-episodic volume which increased 67.6% in Q4, while episodic admissions declined 7.2%. Roughly half of the episodic decrease resulted from the conversion of episodic admissions to non-episodic under the national contract with UnitedHealth initiated in February 2021. We added approximately 3,100 new referral sources in Q4 and a total of approximately $12,200 for 2021. These relationships will serve as a source of revenue and volume growth in 2022 and beyond. Now I'll turn to 2022 guidance. As we look ahead, we are confident the fundamentals of our business are intact. We believe the pandemic has created an even stronger awareness of the high-level care we provide in our inpatient rehabilitation hospitals and further reinforced home as a preferred care setting. We expect stakeholders will increasingly divert admissions away from skilled nursing facilities to higher-value IRFs and home health providers. As the population ages, the demand for high-quality services will increase. We do, however, expect some of the challenges we have been experiencing recently to persist through the first half of the year. Additionally, we are benefiting from the continued suspension of the Medicare sequestration into 2022, but its planned phase-out will dilute our pricing increase at a time when costs remain elevated. The reimplementation of the sequester creates an approximately $50 million headwind to consolidated adjusted EBITDA growth in 2022. Our guidance for 2022 on a consolidated basis includes consolidated net operating revenues of $5.38 to $5.5 billion. consolidated adjusted EBITDA of $1.015 to $1.065 billion, and adjusted earnings per share of $3.83 to $4.19. The key considerations underlying this guidance can be found on page 24 of the supplemental slides. We anticipate providing updated guidance for each of the businesses as the separation date approaches. With that, I'll turn it over to Doug.