Encompass Health Corporation

Good morning, everyone, and welcome to Encompass Health's second quarter 2023 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 one 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's Chief Investor Relations Officer.

Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's second quarter 2023 earnings call. Before we begin, if you do not already have a copy, the second 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 regulatory developments, as well as volume, bad debt, and labor costs 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 the year ended December 31, 2022, and the form 10Q for the quarter ended June 30, 2023 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, Encompass Health's President and Chief Executive Officer.

Thank you, Mark, and good morning, everyone. We are very pleased with our second quarter results, driven by continued strong volume growth and substantial year-over-year improvement in labor costs. Our second quarter revenues increased 11.7% and adjusted EBITDA increased 27.1%. Q2 total discharges increased 9.8%, with same-store discharges up 6.2%. Our strong volume growth continues to underscore our value proposition to referral sources, payers, and patients. As anticipated, our patient acuity continued to broaden with more normalized patient flows to the healthcare system. While we continue to show solid growth in stroke discharges, which were up 5.5% year-over-year, knee and hip replacement, fracture of the lower extremity, and other orthopedic discharges each grew approximately 15% year-over-year. Given the strong demand for inpatient rehabilitation services, We have continued to invest in capacity additions. We opened two de novos in the second quarter, adding 110 beds. This brings us to five de novos and 259 beds added year to date. We also added 10 beds to existing hospitals in the second quarter. Over the balance of the year, we plan to open two more de novos and add 31 beds to existing hospitals. Three of our bed addition projects originally scheduled for 2023 have shifted to 2024, due in each case to local permitting issues. As a result of this shift, we now expect to add approximately 140 beds to existing hospitals in 2024. We continue to build and maintain an active pipeline of de novo projects, both wholly owned and joint ventures, with acute care hospitals. We currently have announced 19 de novos with opening dates beyond 2023. During Q2, we again met the increasing demand for our services while reducing contract labor and sign on and shift bonus expenditures. Contract labor was down approximately $13 million or 37% from Q2 of 2022 while sign on and shift bonuses decreased approximately $8 million or 36% from Q2 of 2022. Our talent acquisition efforts resulted in over 200 net same store RN hires. This is a very strong hiring quarter. We want to remind you that hiring results may vary significantly from quarter to quarter based on seasonality and other factors. Last week, CMS issued the 2024 IRF Final Rule. This included a net market basket update of 3.4%, which we estimate would result in a 3.3% increase for our IRFs beginning October 1st of 2023. Reviewed Choice Demonstration, or RCD, is scheduled to begin August 21st in Alabama. We've been working closely with CMS and Palmetto, the Medicare administrative contractor for the state of Alabama, to prepare for its implementation. While many details have yet to be finalized, we have prepared for its implementation, and we are focused on pre-claim review as we believe it will allow for a more iterative process and the potential for real-time adjustments. Moving now to guidance. Based on our first half performance and revised expectations for the balance of the year, we are increasing our 2023 guidance to include net operating revenue of $4.75 to $4.81 billion, adjusted EBITDA of $920 to $950 million, and adjusted earnings per share of $3.31 to $3.53. The key considerations underlying our guidance can be found on page 12 of the supplemental slides. Finally, I want to remind you that we are hosting an Investor Day in New York City on September 27, 2023. At that meeting, we will provide more detailed insight into key elements of our strategy, including de novo hospitals, clinical technologies, and labor management. If you have not already registered, you may do so in our investor relations website or contact Mark Miller. We hope to see you there. Now, I'll turn it over to Doug for further color on the quarter.