Encompass Health Corporation

Please stand by. Your program is about to begin. If you need assistance during your conference today, please press star zero. Good morning, everyone, and welcome to the Encompass Health's first quarter 2022 earnings conference call. At this time, I would like to inform all participants that their line 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 is being recorded. If you have any objections, you may disconnect at this time. I would 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 first quarter 2022 earnings call. With me on the call today are Mark Tarr, President and Chief Executive Officer, Doug Coulthard, 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 first 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 8K, the form 10K for year ended December 31, 2021, and the form 10Q for the quarter ended March 31, 2022, 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 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. Mark, thank you, and good morning, everyone.

Our Q1 results provide further evidence of the growing demand for the services we provide, as the inpatient rehabilitation discharges increased 7.6% and home health admissions grew 4.9%. Like all healthcare providers, we were impacted by the Omicron surge, particularly in the first half of the quarter, and by continued staffing challenges. The dedication of our team members allowed us to continue to make significant operational and strategic progress in spite of these challenges. We remain confident in the future prospects of our businesses and continue to enhance the positioning of each to capitalize on the growth opportunities ahead. On a consolidated basis, for Q1, we generated 8.4% revenue growth. This revenue growth was offset by higher staffing costs in the quarter, resulting in a 2.3% decline in adjusted EBITDA. In the IRF segment, the strong discharge growth combined with a 2.2% increase in revenue per discharge to drive 10.4% revenue growth. Average daily census increased to a new high of 7,330. These metrics and the balance between the same store and new store growth validate our de novo and bed addition strategies. The continued strong demand for our services in a tight labor market for skilled clinicians necessitated an increase in utilization of agency staffing and sign-on and shift bonuses, resulting in IRF segment adjusted EBITDA declining 3.7%. We believe utilization and rate of agency staffing has peaked, and we expect gradual improvement in the second quarter as net new hires replace agency FTEs, and those staffing contracts that are renewed are at lower negotiated rates. We expect this improvement to accelerate in the second half of the year. Our home health business generated solid admissions growth. Total admissions grew 4.9% in Q1, including 0.9% on a same store basis. Same store admissions grew 3.2% sequentially. As a point of comparison, total home health admissions in the quarter exceeded our prior historical high point achieved in Q1 of 2020. Hospice admissions declined in the quarter. The decline in hospice admissions was driven primarily by capacity constraints as some of our larger branches with historically high average daily census. High staffing costs led to a 1.4% decline in segment adjusted EBITDA. On the home health and hospice staffing front, hiring started slowly in the quarter due to the Omicron surge, but accelerated as the quarter progressed. We ended the quarter with a net increase of 30 full-time nurses. This is on top of the 133 net new FTEs in Q4 and 127 in Q3. We expect to see positive trends in nursing hires as a result of our recruiting strategies and the favorable impact on recruiting and retention stemming from the changes we have implemented over the past year in our compensation structure, including salary market adjustments and updating our mileage reimbursement methodology. Demand for home care remains strong. We will not accept a patient unless we are confident we can admit them timely and deliver the level of care they require. Based predominantly on required staff quarantines, we estimate that we lost 2,150 home health admissions in Q1 of 2022. Given the strong demand for our services, we have continued our capacity addition strategy. We opened three de novo IRFs in the quarter and added 29 beds to existing hospitals. We anticipate opening an additional six de novo IRFs and adding an additional 89 beds to existing hospitals in 2022. We opened four home health and hospice locations in the quarter, two of these via acquisition and anticipate an additional eight de novo openings in 2022. CMS recently issued the 2023 proposed IRF rule and the 2023 proposed hospice rule. For IRFs, CMS proposed a net market basket update of 2.8%, which we estimate would result in a 2.9% increase for our IRF segment beginning October 1st, 2022. As a reminder, this expected increase does not include the impact of sequestration. The IRF final rules expect to be released in late July or early August. For hospice, the proposed net rate update is 2.7%. Again, this is prior to the impact of sequestration. The hospice final rule is also expected in late July or early August. While the rate updates in the IRF and hospice proposed rules are directionally positive, they do not adequately compensate for the elevated staffing costs. We are hopeful that the final rules will provide greater relief. We expect the Home Health 2023 proposed rule to be released in June or July. Moving now to the spinoff of our home health and hospice business into an independent publicly traded company under the new brand name and Habit Home Health and Hospice. We are targeting the consummation of the spinoff on July 1, 2022, subject to the customary conditions, including receipt of a favorable ruling from the IRS and approval of the Form 10 by the SEC. The key assumptions related to the spinoff are included on page 5 of our supplemental slides and have not changed from our previous disclosures other than that rebranding expenses have been revised downward. 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. Moving now to guidance. Our guidance for 2022 consolidated revenue adjusted EBITDA, and adjusted EPS has not changed. The key considerations underlying this guidance can be found on page 16 of the supplemental slides. As a reminder, this guidance assumes the current structure of the business continues throughout 2022. We anticipate providing 2022 guidance for Encompass Health and Enhabit on a separated basis during the first half of June. With that, I'll turn it over to Doug.